SB 41 [Regulation of Lawyer TV Advertising] is (Probably) Dead on Arrival.

Sen. Seth Harp's (photo at right) Bill to Regulate lawyer TV Advertising is (probably) Dead On Arrival.

Hugh Wood (Atlanta, GA). Senator Seth Harp [1], a practicing Georgia attorney, has introduced a bill in Georgia Senate that proposes to regulate Attorney Television Advertising. The Bill, known as Senate Bill 41, or SB41, proposes a new Georgia Statute, OCGA § 15-19-55.1.

The new statute would regulate Legal Television Advertising in Georgia by requiring that the real attorney(s), not actors, appear in the advertisements, require the television advertisement state the city in which the attorney practices in bold type, require television attorneys to “personally consult,” with their clients, require the television attorneys to actually sign the pleadings, and allow a client (unilaterally) to declare a settlement void if certain new television advertisement certifications are not signed by both the television attorney and client at the time of settlement. There are other provisions. The full text is listed in the endnotes. [2]

Senate Bill 41, is seriously flawed for many reasons. [Though, in many ways, I am no fan of attorney television advertising and much of it may be misleading or present “puffed” proposed cash settlements … ] SB 41, is flawed because: 1) only the Georgia Supreme Court may regulate lawyers, 2) SB 41 contradicts current State Bar Rules on Lawyer Advertising, 3) SB 41 runs afoul of United States Supreme Court decisions on “protected commercial speech,” 4) SB 41 is contrary to Georgia Supreme Court precedent, 5) SB 41 is contrary to current 11th Circuit decisions, 6) SB 41 steps into an arena partially regulated by the FCC, and 7) SB 41 contains an unconstitutional unilateral “voiding” of a settlement by a Plaintiff for up to one (1) year after settlement.

1. The General Assembly May Not Regulate the Legal Profession.

The General Assembly has no power to regulate the practice of law. Under the 1983 Georgia Constitution, the Georgia Supreme Court has the sole and exclusive authority to regulate the practice of law. The Supreme Court of Georgia has the inherent and exclusive authority to govern the practice of law in Georgia. Eckles v. Atlanta Tech. Group, 267 Ga. 801, 804, 485 S.E.2d 22 (1997); Huber v. State, 234 Ga. 357, 359, 216 S.E.2d 73 (1975). [3]

2. SB 41 Contradicts State Bar Rule 7 on Lawyer Advertising.

The bill attempts to overlap or supersede prior legislation and regulation concerning lawyer advertising promulgated by the State Bar of Georgia and approved by the Georgia Supreme Court. [4] “A lawyer may advertise through all forms of public media and through written communication not involving personal contact so long as the communication is not false, fraudulent, deceptive or misleading. State Bar Rule 7.1 Lawyer Advertising. [4]

3. SB 41 Violates Commercial Speech Freedom.

SB41 is trumped by Bates v. State Bar of Arizona, 433 U.S. 350, 97 S.Ct. 2691, 53 L.Ed.2d 810 (1977). Not that the United States Supreme Court might trump a Georgia Statute, but 31 years ago the United States Supreme Court weighted into this corpus and completely set aside attempts by the Arizona State Bar and the Arizona Legislature to regulate attorney advertising in newspapers and other media. [5] SB41 faces serious constitutional fights, in federal and state court, if enacted.

4. SB 41 is at Odds with Current Georgia Supreme Court Precedent.

The Georgia Supreme Court has recognized Bates, supra, on many occasions:

It is well established that attorney advertising is a type of commercial speech protected by the First Amendment. Florida Bar v. Went For It, Inc., --- U.S. ---- 115 S.Ct. 2371, 2375, 132 L.Ed.2d 541 (1995); Peel v. Illinois Attorney Registration and Disciplinary Comm'n, 496 U.S. 91, 110 S.Ct. 2281, 110 L.Ed.2d 83 (1990); In re R.M.J., 455 U.S. 191, 199, 102 S.Ct. 929, 935, 71 L.Ed.2d 64 (1982); Bates v. State Bar of Arizona, 433 U.S. 350, 97 S.Ct. 2691, 53 L.Ed.2d 810 (1977). In the Matter of William N. Robbins, 266 Ga. 681, 469 S.E.2d 191 (1996). And, under both federal and Georgia analysis, SB41 is going to fail examination because it cannot show a “substantial governmental interest,” in regulating attorney television advertising. H & H Operations, Inc., d/b/a The Pit Stop Convenience Store v. The City Of Peachtree City, 248 Ga. 500, 283 S.E.2d 867 (1981).

5. SB 41 is at Odds with Current 11th Circuit Precedent.

If SB41 passes, it faces tough sledding in the 11th Circuit given that the 11th Circuit may find lawyer television advertising to be “protected commercial speech.” The 11th Circuit in reviewing similar restrictions on lawyer advertising has applied a United States Supreme Court test enunciated in Central Hudson Gas & Elec. Corp. v. Public Serv. Comm'n., 447 U.S. 557, 100 S.Ct. 2343, 65 L.Ed.2d 341 (1980). Mason v. Florida Bar, 208 F.3d 952 (11th Cir. 2000). [6] Under Central Hudson, SB41, will be required to survive a four (4) prong test: (1) whether the lawyer advertising truthful, (2) whether the state's interests in limiting the speech is substantial, (3) whether the challenged regulation advances these interests in a direct and material way, and (4) whether the extent of the restriction on protected speech is in reasonable proportion to the interests served. Mason, supra, at 596. While such attacks will be hard fought, my guess is SB41 will not survive Central Hudson test.

6. The FCC Regulates Part of this Arena.

The FCC may weigh in on a regulation associated with television advertising. While this short analysis has focused only on the interaction of the Georgia Separation of Powers vs. SB41 and SB41’s ability to navigate the federal “commercial speech,” tests, it may be that SB41 may, additionally, run afoul of FCC regulations. [7]

7. No Plaintiff may “Void” a Settlement Unilaterally for No Consideration.

The portion of the bill allowing a client to unilaterally “void” a settlement for up to a year, if the television attorneys did not follow some new certification faces significant contractual challenges. For example, if a insurance company settles and pays a claim and obtains a dismissal of a action, are we really supposed to believe that the defendant/insurance company is going to tolerate this new language, “shall be voidable by the client, at the client's sole election, for any or no reason, for a period of one year following the purported settlement…” OCGA § 15-19-55.1(e). My guess is this language is not DOA, but dead before filing.

While I have significant reservations about the TV lawyer’s “call me first,” and “we have chiropractors standing by to take your call,” advertising, I doubt the SB41 will survive constitutional or “protected commercial speech,” scrutiny. Perhaps there is a way to tame the odorous TV legal ads, but SB41 its not the proper tool to do it.


Hugh Wood
Wood & Meredith, LLP
3756 Lavista Road
Suite 250
Tucker, GA 30084
404-633-4100
Fax: 404-633-0068
hwood@woodandmeredith.com





& & &

NOTES:

[1]

I like Seth Harp and I certainly don’t want to cross a fellow Auburn Alum. Auburn has had enough trouble with its football program and Tubervillitis to rock too many Auburn boats.

Seth Harp’s contact information is as follows:

Capitol Office:
110 State Capitol
Atlanta, GA 30334
Phone: (404)463-3931
Fax: (404) 463-2279
Email: seth.harp@senate.ga.gov
District 29
Republican
Education: Auburn University, Walter F. George School of Law at Mercer University

[2]

09 LC 34 2033
Senate Bill 41
By: Senator Harp of the 29th


A BILL TO BE ENTITLED
AN ACT



To amend Chapter 19 of Title 15 of the Official Code of Georgia Annotated, relating to attorneys, so as to provide for legislative findings; to regulate and impose conditions on attorneys that advertise on television in the State of Georgia; to provide for a penalty; to provide for related matters; to provide for an effective date; to repeal conflicting laws; and for other purposes.


BE IT ENACTED BY THE GENERAL ASSEMBLY OF GEORGIA:


SECTION 1.
The General Assembly recognizes and declares that the attorney-client relationship is a sacrosanct one in which the client is entitled to faithful and zealous counsel and representation, as pronounced by the Supreme Court of Georgia and the State Bar of Georgia. The General Assembly also recognizes the right of attorneys under existing law to advertise their services on television. Further, the General Assembly finds a legitimate and compelling need to enact the following provisions in order to preserve the sanctity of the attorney-client relationship, as well as the duty of faithful and zealous representation and counsel.


SECTION 2.
Chapter 19 of Title 15 of the Official Code of Georgia Annotated, relating to attorneys, is amended by adding a new Code section to read as follows:
"15-19-55.1.
(a) In any attorney television advertisement in the State of Georgia:
(1) The face and voice appearing in the advertisement shall be of a duly licensed attorney;
(2) The advertisement shall visually and audibly state whether the advertising attorney is licensed to practice in the State of Georgia;
(3) The advertisement shall visually and audibly state the name, city, county, and state of the principal residence of the advertising attorney;
(4) Any advertising disclaimers currently required, or subsequently enacted, by the State Bar of Georgia shall be visually and audibly stated in the television advertisement; and
(5) The type size of the required visual displays shall be no smaller than one-fifth of the projected television screen image.
(b) Any attorney who secures a client through television advertising shall personally consult with the client:
(1) At the time of signing any attorney-client representation and fee agreement;
(2) To obtain authority to engage in presuit settlement efforts and to conclude presuit settlements; and
(3) To discuss and counsel the client regarding whether a lawsuit should be filed.
(c) Where a lawsuit is filed, any attorney who has secured the client through television advertising:
(1) Shall personally consult with the client to answer and certify necessary discovery responses, as required by Chapter 11 of Title 9, the 'Georgia Civil Practice Act';
(2) Shall act as lead counsel or co-lead counsel in the case and so indicate by signature on all pleadings, discovery responses, motions and responses, and pretrial submissions; and
(3) Absent good cause shown to the trial court and an order obtained thereon, shall personally appear at all depositions, motion hearings, pretrial conferences, and the trial of the action.
(d) No settlement agreement involving a client represented by an attorney who secured the client through television advertising shall be binding on any party unless:
(1) The advertising attorney and the client each certify in writing and under oath that the advertising attorney personally consulted with the client regarding the advisability of settlement and obtained the express authority of the client to enter into the settlement; and
(2) The certifications required by paragraph (1) of this subsection include the date, time, and method of personal consultation between the attorney and the client.
(e) Any settlement agreement entered into in violation of subsection (d) of this Code section shall be voidable by the client, at the client's sole election, for any or no reason, for a period of one year following the purported settlement, upon written notice by the client to the advertising attorney.
(f) In order to determine whether the client was secured through television advertising, any attorney who advertises his or her services on television shall have each client certify in writing, at the time of signing any representation agreement, whether the employment was influenced, in whole or in part, by virtue of any television advertisement. If the answer is affirmative, subsections (b) through (e) of this Code section shall apply, and the attorney shall explain these provisions to the client and deliver a copy of these provisions to the client at the time the representation agreement is executed. These requirements shall apply to any client represented by the advertising attorney and extend for a period of two years following the last television advertisement shown in the State of Georgia. For compliance purposes, these records shall be maintained throughout the representation and for a period of four years following the conclusion of the representation. The records shall be subject to audit by the State Bar of Georgia."


SECTION 3.
Said chapter is further amended by revising subsection (a) of Code Section 15-19-56, relating to the penalty for prohibited conduct, as follows:
"(a) Any person, corporation, or voluntary association violating Code Section 15-19-51, 15-19-53, 15-19-54, or 15-19-55, or 15-19-55.1 shall be guilty of a misdemeanor."


SECTION 4.
This Act shall become effective on July 1, 2009.


SECTION 5.
All laws and parts of laws in conflict with this Act are repealed.


[3]

The Power to Control the Practice of Law is an Inherent Power of the Georgia Supreme Court and its Plenary Trial Courts.

“The right to practice law is not a natural or constitutional right, nor an absolute right or a right de jure, but is a privilege or franchise.' " Sams v. Olah, 225 Ga. 497, 504, 169 S.E.2d 790 (1969). An attorney is an officer of the court and, as such, has a responsibility to the courts and to the public which is no less significant than the obligation he owes to his clients. " 'The office of attorney is indispensable to the administration of justice and is intimate and peculiar in its relation to, and vital to the well-being of, the court.' [Cit.]" Gordon v. Clinkscales, 215 Ga. 843, 114 S.E.2d 15 (1960). Eckles v. Atlanta Tech. Group, 267 Ga. 801, 805, 485 S.E.2d 22 (1997)

The Georgia Supreme Court is the sole controller of the practice of law in Georgia. There can be no other. "The Supreme Court of Georgia has the inherent and exclusive authority to govern the practice of law in Georgia. Eckles v. Atlanta Tech. Group, 267 Ga. 801, 804, 485 S.E.2d 22 (1997); Huber v. State, 234 Ga. 357, 359, 216 S.E.2d 73 (1975). [ * * * ]"

The Georgia Supreme Court restated its authority concerning the governance of attorneys in Georgia in GRECAA, Inc. v. Omni Title Services, Inc., 277 Ga. 312, 588 S.E.2d 709 (2003), when it stated, "[n]o statute is controlling as to the civil regulation of the practice of law in this state. Only this Court has the inherent power to govern the practice of law in Georgia." GRECAA, Supra at 312.

It is the responsibility of this court to provide effective standards for admission to the practice of law and for the discipline of those admitted to practice. Litigation must be projected through the courts according to established practice by lawyers who are of high character, skilled in the profession, dedicated to the interest of their clients, and in the spirit of public service. In the orderly process of the administration of justice, any retreat from those principles would be a disservice to the public. To allow a corporation to maintain litigation and appear in court represented by corporate officers or agents only would lay open the gates to the practice of law for entry to those corporate officers or agents who have not been qualified to practice law and who are not amenable to the general discipline of the court. Eckles, Supra at 312.


[4]


RULE 7.1 COMMUNICATIONS CONCERNING A LAWYER'S SERVICES
(a) A lawyer may advertise through all forms of public media and through
written communication not involving personal contact so long as the
communication is not false, fraudulent, deceptive or misleading. By way of
illustration, but not limitation, a communication is false, fraudulent,
deceptive or misleading if it:
(1) contains a material misrepresentation of fact or law or omits a fact
necessary to make the statement considered as a whole not materially
misleading;

(2) is likely to create an unjustified expectation about results the lawyer
can achieve, or states or implies that the lawyer can achieve results by
means that violate the Georgia Rules of Professional Conduct or other law;

(3) compares the lawyer's services with other lawyers' services unless the
comparison can be factually substantiated;

(4) fails to include the name of at least one lawyer responsible for its
content; or

(5) contains any information regarding contingent fees, and fails to
conspicuously present the following disclaimer:

"Contingent attorneys' fees refers only to those fees charged by attorneys
for their legal services. Such fees are not permitted in all types of
cases. Court costs and other additional expenses of legal action usually
must be paid by the client."

(6) contains the language 'no fee unless you win or collect' or any similar
phrase and fails to conspicuously present the following disclaimer:

"No fee unless you win or collect" [or insert the similar language used in
the communication] refers only to fees charged by the attorney. Court costs
and other additional expenses of legal action usually must be paid by the
client. Contingent fees are not permitted in all types of cases.

(b) A public communication for which a lawyer has given value must be
identified as such unless it is apparent from the context that it is such a
communication.

(c) A lawyer retains ultimate responsibility to insure that all
communications concerning the lawyer or the lawyer's services comply with
the Georgia Rules of Professional Conduct.

The maximum penalty for a violation of this Rule is disbarment.

Comment

[1] This rule governs the content of all communications about a lawyer's
services, including the various types of advertising permitted by Rules 7.3
through 7.5. Whatever means are used to make known a lawyer's services,
statements about them should be truthful.

[2] The prohibition in sub-paragraph (a)(2) of this Rule 7.1:
Communications Concerning a Lawyer's Services of statements that may create
"unjustified expectations" would ordinarily preclude advertisements about
results obtained on behalf of a client, such as the amount of a damage
award or the lawyer's record in obtaining favorable verdicts, and
advertisements containing client endorsements. Such information may create
the unjustified expectation that similar results can be obtained for others
without reference to the specific factual and legal circumstances.

Affirmative Disclosure

[3] In general, the intrusion on the First Amendment right of commercial
speech resulting from rationally-based affirmative disclosure requirements
is minimal, and is therefore a preferable form of regulation to absolute
bans or other similar restrictions. For example, there is no significant
interest in failing to include the name of at least one accountable
attorney in all communications promoting the services of a lawyer or law
firm as required by sub-paragraph (a)(5) of Rule 7.1: Communications
Concerning a Lawyer's Services. Nor is there any substantial burden imposed
as a result of the affirmative disclaimer requirement of sub-paragraph
(a)(6) upon a lawyer who wishes to make a claim in the nature of "no fee
unless you win." Indeed, the United States Supreme Court has specifically
recognized that affirmative disclosure of a client's liability for costs
and expenses of litigation may be required to prevent consumer confusion
over the technical distinction between the meaning and effect of the use of
such terms as "fees" and "costs" in an advertisement.

[4] Certain promotional communications of a lawyer may, as a result of
content or circumstance, tend to mislead a consumer to mistakenly believe
that the communication is something other than a form of promotional
communication for which the lawyer has paid. Examples of such a
communication might include advertisements for seminars on legal topics
directed to the lay public when such seminars are sponsored by the lawyer,
or a newsletter or newspaper column which appears to inform or to educate
about the law. Paragraph (b) of this Rule 7.1: Communications Concerning a
Lawyer's Services would require affirmative disclosure that a lawyer has
given value in order to generate these types of public communications if
such is in fact the case.

Accountability

[5] Paragraph (c) makes explicit an advertising attorney's ultimate
responsibility for all the lawyer's promotional communications and would
suggest that review by the lawyer prior to dissemination is advisable if
any doubts exist concerning conformity of the end product with these Rules.
Although prior review by disciplinary authorities is not required by these
Rules, lawyers are certainly encouraged to contact disciplinary authorities
prior to authorizing a promotional communication if there are any doubts
concerning either an interpretation of these Rules or their application to
the communication.

RULE 7.2 ADVERTISING
(a) Subject to the requirements of Rules 7.1 and 7.3, a lawyer may
advertise services through:
(1) public media, such as a telephone directory, legal directory, newspaper
or other periodical;

(2) outdoor advertising;

(3) radio or television;

(4) written, electronic or recorded communication.

(b) A copy or recording of an advertisement or communication shall be kept
for two years after its last dissemination along with a record of when and
where it was used.

The maximum penalty for a violation of this Rule is a public reprimand.

Comment

[1] To assist the public in obtaining legal services, lawyers should be
allowed to make known their services not only through reputation but also
through organized information campaigns in the form of advertising.
Advertising involves an active quest for clients, contrary to the tradition
that a lawyer should not seek clientele. However, the public's need to know
about legal services can be fulfilled in part through advertising. This
need is particularly acute in the case of persons of moderate means who
have not made extensive use of legal services. The interest in expanding
public information about legal services ought to prevail over
considerations of tradition. Nevertheless, advertising by lawyers entails
the risk of practices that are misleading or overreaching.

[2] This Rule permits public dissemination of information concerning a
lawyer's name or firm name, address and telephone number; the kinds of
services the lawyer will undertake; the basis on which the lawyer's fees
are determined, including prices for specific services and payment and
credit arrangements; a lawyer's foreign language ability; names of
references and, with their consent, names of clients regularly represented;
and other information that might invite the attention of those seeking
legal assistance.

[3] Questions of effectiveness and taste in advertising are matters of
speculation and subjective judgment. Some jurisdictions have had extensive
prohibitions against television advertising, against advertising going
beyond specified facts about a lawyer, or against "undignified"
advertising. Television is now one of the most powerful media for getting
information to the public, particularly persons of low and moderate income;
prohibiting television advertising, therefore, would impede the flow of
information about legal services to many sectors of the public. Limiting
the information that may be advertised has a similar effect and assumes
that the bar can accurately forecast the kind of information that the
public would regard as relevant.

[4] Neither this Rule nor Rule 7.3: Direct Contact with Prospective Clients
prohibits communications authorized by law, such as notice to members of a
class in class action litigation.

Record of Advertising

[5] Paragraph (b) requires that a record of the content and use of
advertising be kept in order to facilitate enforcement of this Rule.


[5]

433 U.S. 350 (1977)
97 S.Ct. 2691, 53 L.Ed.2d 810
Bates
v.
State Bar of Arizona
No. 76-316
United States Supreme Court
June 27, 1977
Argued January 18, 1977
APPEAL FROM THE SUPREME COURT OF ARIZONA
Syllabus
Appellants, who are licensed attorneys and members of the Arizona State Bar, were charged in a complaint filed by the State Bar's president with violating the State Supreme Court's disciplinary rule, which prohibits attorneys from advertising in newspapers or other media. The complaint was based upon a newspaper advertisement placed by appellants for their "legal clinic," stating that they were offering "legal services at very reasonable fees," and listing their fees for certain services, namely, uncontested divorces, uncontested adoptions, simple personal bankruptcies, and changes of name. The Arizona Supreme Court upheld the conclusion of a bar committee that appellants had violated the rule, having rejected appellants' claims that the rule violated §§ 1 and 2 of the Sherman Act because of its tendency to limit competition, and that it infringed appellants' First Amendment rights.
Held:
1. The restraint upon attorney advertising imposed by the Supreme Court of Arizona wielding the power of the State over the practice of law is not subject to attack under the Sherman Act. Parker v. Brown, 317 U.S. 341, followed; Goldfarb v. Virginia State Bar, 421 U.S. 773; Cantor v. Detroit Edison Co., 428 U.S. 579, distinguished. Pp. 359-363.
2. Commercial speech, which serves individual and societal interests in assuring informed and reliable decisionmaking, is entitled to some First Amendment protection, Virginia Pharmacy Board v. Virginia Consumer Council, 425 U.S. 748, and the justifications advanced by appellee are inadequate to support the suppression of all advertising by attorneys. Pp. 363-384.
(a) This case does not involve any question concerning in-person solicitation or advertising as to the quality of legal services, but only the question whether lawyers may constitutionally advertise the prices at which certain routine services will be performed. Pp. 366-367.
(b) The belief that lawyers are somehow above "trade" is an anachronism, and for a lawyer to advertise his fees will not undermine true professionalism. Pp. 368-372.
(c) Advertising legal services is not inherently misleading. Only routine services lend themselves to advertising, and, for such services, fixed rates can be meaningfully established, as the Arizona State Bar's own Legal Services Program demonstrates. Although a client may not
Page 351
know the detail involved in a given task, he can identify the service at the level of generality to which advertising lends itself. Though advertising does not provide a complete foundation on which to select an attorney, it would be peculiar to deny the consumer at least some of the relevant information needed for an informed decision on the ground that the information was not complete. Pp. 372-375.
(d) Advertising, the traditional mechanism in a free market economy for a supplier to inform a potential purchaser of the availability and terms of exchange, may well benefit the administration of justice. Pp. 375-377.
(e) It is entirely possible that advertising will serve to reduce, not advance, the cost of legal services to the consumer, and may well aid new attorneys in entering the market. Pp. 377-378.
(f) An attorney who is inclined to cut quality will do so regardless of the rule on advertising, the restraints on which are an ineffective deterrent to shoddy work. Pp. 378-379.
(g) Undue enforcement problems need not be anticipated, and it is at least incongruous for the opponents of advertising to extol the virtues of the legal profession while also asserting that, through advertising, [97 S.Ct. 2693] lawyers will mislead their clients. P. 379.
3. The First Amendment overbreadth doctrine, which represents a departure from the traditional rule that a person may not challenge a statute on the ground that it might be applied unconstitutionally in circumstances other than those before the court, is inapplicable to professional advertising, a context where it is not necessary to further its intended objective, cf. Bigelow v. Virginia, 421 U.S. 809, 817-818, and appellants must therefore demonstrate that their specific conduct was constitutionally protected. Pp. 379-381.
4. On this record, appellants' advertisement (contrary to appellee's contention) is not misleading, and falls within the scope of First Amendment protection. Pp. 381-382.
(a) The term "legal clinic" would be understood to refer to an operation like appellants' that is geared to provide standardized and multiple services. Pp. 381-382.
(b) The advertisement's claim that appellants offer services at "very reasonable" prices is not misleading. Appellants' advertised fee for an uncontested divorce, which was specifically cited by appellee, is in line with customary charges in the area. P. 382.
(c) Appellants' failure to disclose that a name change might be accomplished by the client without an attorney's aid was not misleading, since the difficulty of performing the task is not revealed, and since most
Page 352
legal services may be performed legally by the citizen for himself. See Faretta v. California, 422 U.S. 806. P. 382.



[6]

208 F.3d 952 (11th Cir. 2000)
Steven G. MASON, Plaintiff-Appellant,
v.
FLORIDA BAR, Defendant-Appellee.
No. 99-2138.
United States Court of Appeals, Eleventh Circuit
April 6, 2000
Page 953
[Copyrighted Material Omitted]
Page 954
Appeal from the United States District Court for the Middle
District of Florida.
Before DUBINA and BLACK, Circuit Judges, and HILL, Senior Circuit
Judge.
DUBINA, Circuit Judge:
This case involves facial and as applied challenges to Rule
4-7.2(j) of the Rules Regulating the Florida Bar ("Rule 4-7.2(j)"), which
prohibits statements made by lawyers in advertisements or written
communications that are "self laudatory" or that describe or characterize
the quality of legal services. In particular, Appellant Steven G. Mason
("Mason") challenges the application of Rule 4-7.2(j) as a violation of his
First Amendment rights and charges that Rule 4-7.2(j) is void-for-vagueness
under the First Amendment as it applies to the states via the Due Process
Clause of the Fourteenth Amendment.

[7]

Federal Communications Commission (FCC) regulations created pursuant to 47 U.S.C. § 151 and 47 U.S.C. § 154.

The Proposed Aggregator Bank is A Trojan Horse for the New “United States Bank.”

Hugh Wood, Atlanta, GA.

Five Months after US Treasury Sec. Paulson asked for TARP Funds (and at this writing not having used not a dime to buy toxic assets), he now proposes yet another solution – A new US Government Owned “Aggregator Bank.” [1] While this idea comes not from the RTC but from the Swedish Banking Crisis of 1990-1993, it has the potential to go far afield of its stated purpose.

Sweden’s bank crisis began with Swedish bank deregulation in the late 1980s. Deregulation rapidly eased credit. Easy credit allowed intensive investment in Swedish real estate. Like our (US) recent housing bubble, Swedish real estate prices soared in the late 1980s. As easy credit pushed prices higher Swedish banks loaned more krona against quickly appreciating hard Swedish real estate assets. When the Swedish real estate market collapsed the asset “values” deflated quickly. Swedish borrowers and their creditors, the Swedish banks, found themselves suddenly illiquid. [2] Does this sound vaguely familiar?

Sweden eventually mopped up the mess, but it cost them 2% of their entire GNP for a number of years. One of the RTC similar vehicles Sweden used in its bank/credit disaster cleanup was a toxic asset holding bank called Securum. “Securum was the Swedish state company founded in 1992 during the financial crisis in Sweden 1990-1994 for the purpose of taking on and unwinding bad debts from the partly state-owned Nordbanken bank.” [3] Securum, like the former (now dissolved) RTC, completed it assignment and was dissolved in 1997. [4]

Sec. Paulson, and soon to be Treasury Sec. Tim Geithner, New York Federal Reserve Chairman, now propose we create a US version of Securum – the new US Aggregator Bank.

This may work. My fear is that, given our unique US History in banking, our new US “Aggregator Bank,” will never be “dissolved.”

The First Bank of the United States Charter expired during political infighting in James Madison’s administration. Madison revived it as the Second Bank of the United States. President Andrew Jackson killed the Second Bank of the United States by Veto in 1832. [5].

We were free of a centralized banking system until the Panic of 1907 brought us the semi public/private Federal Reserve Banking System in 1913. The Federal Reserve (the de facto Third Bank of the United States) is not a true government entity and is not under the complete “control” of the United States Government. “Reserve Banks, as privately owned entities, receive no appropriated funds from Congress,” Lewis v. United States, 680 F.2d 1239 (1982).

Examining the organization and function of the Federal Reserve Banks, and applying the relevant factors, we conclude that the Reserve Banks are not federal instrumentalities for purposes of the FTCA, but are independent, privately owned and locally controlled corporations. [ & & &] Each Federal Reserve Bank is a separate corporation owned by commercial banks in its region. The stockholding commercial banks elect two thirds of each Bank's. Id.

None of this (not a government entity) would be true for the new “Aggregator Bank,” It would be 100% owned by the Federal Government. Its initial purpose would be as a dump to process toxic assets, but at some point and at some day in the future it will have completed its toxic clean up function.

Then what will happen to this new Bank?

Consider: Here is this baby Bank -- This 100% owned “Bank,” created for the Executive Branch, funded by Congress, to do with it as they see fit. [6]

If the Federal Reserve does not truly fit as a square peg into the round hole of being the “Third United States Bank” then this 100 percent owned entity could easily become the Third Bank of the United States.

No one will recognize it as the Third United States Bank at its birth, because it is being born into a toxic cesspool.

But when the cesspool of toxic assets clears, will it be dissolved? Probably not.

The RTC concluded, but it was not a US 100% owned “Bank.”

No amount of “sunset,” language in its Charter will overcome the allure and economic drug addiction of granting the Executive Branch, funded by a willing Congress, its own (wholly owned) banking Toy. Am I deluded? Perhaps. However, this risk of giving the Executive Bank it own 100% owned banking Toy is so great that it is a risk worth discussing publically in this current, “worst economic crisis since the Great Depression.” [7]

Should I be skeptical? Secretary Paulson told us in September of 2008 he needed 700bn dollars to clean up toxic assets. Did he clean up any toxic assets? No. He bought stock in failing US Banks. Did those banks clean up any toxic assets? No. Has the Secretary purchased any toxic assets? No. The Secretary has not purchased a dime of toxic assets. Yet, we are on the hook for 350bn of the first half of TARP.

While murky, Treasury now proposes to use the second half of TAPP to purchase toxic assets. How? In a shiny new government owned bank.

When we fronted Sec. Paulson 700bn, no new bank was discussed. Now, we urgently need a 100% government owned bank for toxic assets.

Perhaps I am misinformed.

Perhaps I have not read the proper government pamphlets.

But, let me say that as I walk around and look at this shiny new “Aggregator” Bank and kick it Aggregator tires, I get the uneasy feeling in my stomach that I am, in fact, looking at the new unrevealed Third Bank of the United States.

Hoping that I am wrong and Treasury is not foisting a Trojan Horse Bank on the Public, I leave you with the words of President Andrew Jackson in his veto of the Second Bank of the United States.

The bill " to modify and continue " the act entitled "An act to incorporate the subscribers to the Bank of the United States " was presented to me on the 4th July instant. Having considered it with that solemn regard to the principles of the Constitution which the day was calculated to inspire, and come to the conclusion that it ought not to become a law, I herewith return it to the Senate [Vetoed], in which it originated, with my objections. President Jackson's Veto Message Regarding the Bank of the United States; July 10, 1832. [8]


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Notes

[1] U.S. ‘Bad Bank’ Plan Gets Momentum to Revive Lending, By Robert Schmidt and Craig Torres
Jan. 16 (Bloomberg) – “Renewed questions about U.S. banks' viability are pushing regulators toward a new plan that would remove toxic assets from bank balance sheets, in what may become the biggest effort yet to unfreeze lending.
President-elect Barack Obama's advisers see an increasingly grave banking crisis and are considering proposals far more sweeping than any steps that have been taken so far, according to people who've discussed the outlook with them.
"They need to do something dramatic," said Harvard University Professor Kenneth Rogoff, a former chief economist at the International Monetary Fund, and member of the Group of Thirty counselors on financial matters, a panel that includes Treasury Secretary-designate Timothy Geithner and Lawrence Summers, incoming director of the National Economic Council.
Officials at the Federal Reserve and other agencies are focusing on the option of setting up a so-called bad bank that would acquire hundreds of billions of dollars of troubled securities now held by lenders. That may allow banks to reduce write-offs, free up capital and begin to increase lending. Paul Miller, a bank analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia, estimates that financial institutions need as much as $1.2 trillion in new aid.
Other steps that may be under consideration include providing further guarantees for toxic assets that remain on the banks' books, as officials did for Citigroup Inc. in November and with a $118 billion backstop for Bank of America Corp. today, or purchasing selected investments. Federal Deposit Insurance Corp. Chairman Sheila Bair yesterday played down the alternative of nationalizing lenders.”

See also,
Obama team weighs government bank to ease crisis. By Tim Ahmann
WASHINGTON (Reuters) – “The incoming Obama administration is considering setting up a government-run bank to acquire bad assets clogging the financial system, a person familiar with the Obama team's thinking said on Saturday.
The U.S. Federal Reserve, Treasury and Federal Deposit Insurance Corp have been in talks about ways to ease a banking crisis that is once again deepening -- and a government-run "aggregator bank" is among the options.
Outgoing Treasury Secretary Henry Paulson and FDIC Chairman Sheila Bair both said on Friday a government bank was one of a number of ideas U.S. regulators had been discussing.
The source said advisers to President-elect Barack Obama, who takes office on Tuesday, were also considering the idea of an aggregator bank among a range of options that could be pursued.”

[2] It may have been (also) the European Exchange Rate Mechanism [ERM] that came into effect in 1992 that has some significant effect on the collapse.

[3] Wiki.

[4] England, Peter, The Swedish Banking Crisis its Roots and Consequences, Oxford Review of Economic Policy (1999), Vol. 15, No. 3, at 94.

[5] President Jackson's Veto Message Regarding the Bank of the United States; July 10, 1832; The Avalon Project of the Yale Law School. http://avalon.law.yale.edu/19th_century/ajveto01.asp

[6] We know Congress has the “power” to create a wholly government owned US Bank. McCulloch v. Maryland, 17 U.S. 316 (1819), 17 U.S. (4 Wheat.) 316; 4 L. Ed. 579; (1819). “Although, among the enumerated powers of government, we do not find the word "bank" or "incorporation," we find the great powers, to lay and collect taxes; to borrow money; to regulate commerce; to declare and conduct a war; and to raise and support armies and navies. . . . But it may with great reason be contended, that a government, entrusted with such ample powers . . . must also be entrusted with ample means for their execution. The power being given, it is the interest of the nation to facilitate its execution. . . .”

[7] “You know, we are at a defining moment in our history. Our nation is involved in two wars, and we are going through the worst financial crisis since the Great Depression.” Barak Obama, Presidential Debate, University of Mississippi, September 26, 2008.

[8] President Jackson’s Veto Message, Op. Cit.

Experts Say: Bring Back the 1933 Home Owners Loan Corporation. Really?

Experts Say: Bring Back the 1933 Home Owners Loan Corporation. Really?

Here is a reprint of an Article that appeared the Prestigious Economic Journal the RGE Monitor.

Dr. Paul Davidson asserts in his article, that the 2008 700bn (and growing) bailout, may soften the recession. However, it will not solve the banking liquity crisis unless other measures are taken.

He asserts, as a Nation, we must immediatly do two things:

1) We must bring back some form of the 1933 Home Owners Loan Corporation (HOLC) Fn.1; then,

2) We must enact a stimulus plan large enough to get the US through this recession.

Then, after a new HOLC is established and a new stimulus plan is in place, Dr. Davidson asserts the SEC must make significant changes. He postulated that to prevent this massive and overseas and domestic illiquidity from occurring again (I thought that is what we said in the last depression.), the SEC must enact three (3) new Rules. Those three (3) new Rules are:

1) A new SEC Rule that mandates that any "securities" sold (for ease of reference) such as the illiquid securities backed by various tranches of home mortgages, be marked "these do not have a public market." Or, they should be marked with some words or notice to that effect. He asserts that the public and investors be given notice that the securities do not have a quick liquid market;

2) The SEC must stop the sale of securities that originated in the private market. Think about it new Rule, it makes sense. The derivatives that brought the world to a halt were backed by not very credit worthy US homeowners refinancing homes at unsustainable rates; and,

3) The SEC (or Congress at the urging of the SEC) must reinstate a version of the 1933 Glass-Steagall Act. Fn.2 He asserts that banks need to be banks. They should not be banks and underwriters at the same time.

Hugh Wood, Atlanta, GA

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Evaluating Toxic Assets - And Where Do We Go Next

Dr. Paul Davidson

Remember that the original Paulson bailout plan and the major function of the revised TARP rescue legislation is an attempt to prevent massive insolvencies in financial institutions that have, on their balance sheets, "securitized" assets (e.g., Mortgage Backed securities [MBS, CDOs, credit default swaps ,etc] that had become virtually illiquid as the market for these "securitized" have failed.

There are three points that I wish to discuss. One: what was the cause of the failure of these securitized markets? Two: what policies do we need to put in place to present toxic asset problem from recurring again? Three, even with the passage of the TARP "rescue" (bailout) plan, the U.S. economy is experiencing a recession. What should the government due to constrain the downturn until a new Administration takes office next January? I have written an article entitled "Securitization, Liquidity, and Market Failure" that was published in the May/June 2008 issue of CHALLENGE . It explains at length why these securitized markets were bound to ultimately fail.

In the good old days, before "securtization ", when a bank made a loan, especially a mortgage loan, the loan contract was basically an illiquid asset that was listed on the asset side of the bank's balance sheet. What value was put on these illiquid assets on the balance sheet? If there was no market for these illiquid assets -- one cannot mark to market the asset!! So they assets were typically carried on the balance sheet at the value of the outstanding loan -- until, it was paid off -- or defaulted on!

Now a good neoclassical theorist would have said that the value of the outstanding loan contract is the computed present value of the future stream of cash receipts including the discounted value of the pay off of the principle (in the case of an interest only loan). Of course, the implicit neoclassical assumption underlying this type of present value calculation is that the future was "known" at least with statistical reliability, i.e., the future is determined as an ergodic stochastic process. If the future stream of payments are known with statistical reliability, then anyone who took a course in economics can calculate the "objective" actuarial present value. (And remember under the rational expectations hypothesis - the subjective probability distribution equals the objective probability distribution that governs future outcomes.) If, however, the future is uncertain, i.e., nonergodic, then the present value depends on the subjective evaluation as to whether all the contractually payments specified (in monetary terms) to specific dates are actually going to be met by the borrower. A large down payment on a mortgage loan created a cushion for the banker in case a future, unpredicted, default occurred.

For assets that are liquid, as I specify in my JOHN MAYNARD KEYNES (Palgrave, New York, 2007) book and the securitization" article in CHALLENGE, there must be an well-organized and orderly markets. Liquidity requires a market maker to assure orderly markets-- so that a holder can always make a fast exit and sell their holdings of any liquid asset at a price not much different that the previous transaction price.

The break down of regulations separating banks who make illiquid loans and investment bankers whose function is to float new issue assets in orderly (liquid) markets is the basis of the current crisis. Starting in the late 1970s some Federal Reserve Bank decisions were made that encouraged securitization of illiquid bank loans to a limited extent. But ultimately the firewall between banks and investment banks was destroyed with the repeal of the Glass Steagall Act in 1999-- by an act where Phil Gramm was the senior sponsor of the repeal. [See my January 2008 Schwartz CEPA Policy Note entitled "How to Solve The U.S. Housing Problem and Avoid a Recession: A Revived HOLC and RTC"]

Thus beginning with decisions made almost three decades ago the seeds were planted and the ultimate fruition occurring in 1999 with the repeal of the Glass Steagall Act, more and more illiquid assets were securitized -- but without a credible market maker for these securitized assets. Securitization may have made underlying illiquid assets look like they were liquid assets -but they were not always going to be liquid -- thus they could become toxic - when some unforeseen event occurs that induces herd behavior for a fast exit.

These securitized assets have no well organized, orderly market with a market maker. Given the housing problem, there is no orderly market price to evaluate the worth of these toxic assets. No one knows exactly how to evaluate the MBS, and other exotic financial assets on the balance sheet of holders. The SEC had made a rule of mark -to-market for traded securities. In these days, however, the last market price in the disorderly markets of these TOXIC assets might have been "a fire sale price" , for example, at 50 to 70 per cent discount. Accordingly if the financial institutions holding these assets marks these assets to market, they will be insolvent. The original Paulson plan [only 3 pages long] gave Paulson the right to buy these illiquid assets at a price not to exceed the price the holder originally paid. If the price was at or near the original holders's purchase price, this would improve balance sheets tremendously and take away the fear of insolvency.

But this would mean the holders of these assets might get away scot free after making horrible investment decisions. [After all, neoclassical economists would say that if you make a bad decision, the market should punish you -- and if that means bankruptcy so be it. It will prevent the moral hazard problem in the future.]

On 9/30/08, the SEC suggested possible new accounting principles for evaluating these essentially toxic [illiquid] assets using "fair value" instead of mark to market.. The SEC news release is as follows:
SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting FOR IMMEDIATE RELEASE 2008-234

Washington, D.C., Sept. 30, 2008 - The current environment has made questions surrounding the determination of fair value particularly challenging for preparers, auditors, and users of financial information. The SEC's Office of the Chief Accountant and the staff of the FASB have been engaged in extensive consultations with participants in the capital markets, including investors, preparers, and auditors, on the application of fair value measurements in the current market environment.

There are a number of practice issues where there is a need for immediate additional guidance. The SEC's Office of the Chief Accountant recognizes and supports the productive efforts of the FASB and the IASB on these issues, including the IASB Expert Advisory Panel's Sept. 16, 2008 draft document, the work of the FASB's Valuation Resource Group, and the IASB's upcoming meeting on the credit crisis. To provide additional guidance on these and other issues surrounding fair value measurements, the FASB is preparing to propose additional interpretative guidance on fair value measurement under U.S. GAAP later this week.

While the FASB is preparing to provide additional interpretative guidance, SEC staff and FASB staff are seeking to assist preparers and auditors by providing immediate clarifications. The clarifications SEC staff and FASB staff are jointly providing today, based on the fair value measurement guidance in FASB Statement No. 157, Fair Value Measurements (Statement 157), are intended to help preparers, auditors, and investors address fair value measurement questions that have been cited as most urgent in the current environment.
* * *.HOW is that for determining "fair value"? What will the Secretary of the Treasury use to decide fair market value?

Mitigating the current recession.

The bailout bill may buy some time to prevent a complete collapse of the financial system - but it will not prevent the recession that the US has already entered. What is needed is at several additional policy actions;
(1), To prevent any further houses becoming vacant due to foreclosure, another HOME OWNERS LOAN CORPORATION [HOLC] (similar to the one created in the Roosevelt Administration) is needed. The HOLC would buy up mortgages (at a discount) and renegotiate new mortgages with home owner-occupiers at monthly payments they can afford possibly (a) by lengthening the life of the mortgage perhaps to 40 years,(b) by reducing principle, and c) by lowering interest rates. If the homeowner- occupier still can not make monthly payment requirements on a renegotiated mortgage, the HOLC should rent the house on a month to month lease to the occupier at a rent he/she can afford until it can be sold for at least the value of the mortgage that the taxpayers bought out. (See my Schwartz CEPA Policy Note)

This will at least limit if not end the fall in housing prices. Until housing prices recover, the economy will remain in a funk .
(2) A quick, temporary stimulus plan should be done in order to limit the depressing effects of the recession and to carry the economy over until at least February 2009 when a new Administration can develop investment policies`in repairing infrastructure, alternative energy R&D, tax sharing with local and state municipalities, etc. For example, as suggested by Warren Mosler, a temporary payroll tax holiday effective immediately and lasting until February 28, 2009 should be enacted. This is equivalent to giving most wage earners a wage increase of over 6 %. It will also provide business firms with a reduction in their costs of production in a period where working capital loans are difficult to obtain.

Policies to prevent future toxic assets

Given the current experience of failed toxic asset markets, it would appear that the SEC has been lax in pursuing its stated mission of investor protection. Accordingly the United States Congress should require the SEC to enforce diligently the following rules:

1. Public notice of potential illiquidity for securities traded in markets that do not have a credible market maker. Since the mandate of the SEC is to assure orderly public financial markets, and "require that investors receive financial and other significant information concerning securities being offered for public sales, and prohibit deceit, misrepresentations, .... in the sale of securities", it is would seem obvious that all public financial markets that are organized without the existence of a credible market maker should, either (1) be shut down because of the potential for disorderliness, or (2) at a minimum, information regarding the potential illiquidity of such assets should be widely advertised and made part of essential information that must be given to each purchaser of the asset being traded.

The draconian action suggested in (1) above is likely to meet with severe political resistance, as the financial community will argue that in a global economy, with the ease of electronic transfer of funds, a prohibition of this sort would merely encourage investors looking for higher yields to deal with foreign financial markets and underwriters to the detriment of domestic financial institutions and domestic industries trying to obtain capital funding.
In my KEYNES [2007] book, I have proposed an innovative international payments system, that could prevent US residents from trading in foreign financial markets that the U.S. deemed detrimental to American firms that obeyed SEC rules while foreign firms did not follow SEC rules. If, however, we assume that the current global payments system remains in effect, and there is a fear of loss of jobs and profits for American firms in the FIRE industries, then the SEC could permit the existence of public financial markets without a credible market maker as long as the SEC required the organizers of such markets to clearly advertise the possible loss of liquidity that can occur to holders of assets traded in these markets.

A civilized society does not believe in "caveat emptor" for markets where products are sold that can have terribly adverse health effects on the purchaser. Despite the widespread public information that smoking is a tremendous health hazard, government regulations still require cigarette companies to print in bold letters on each package of cigarettes the caution warning that "Smoking can be injurious to your health". In a similar manner, any purchases on an organized public financial market that does not have a credible market maker can have serious financial health effects on the purchasers. Accordingly, the SEC should require the following warning to potential purchasers of assets traded in a market without a credible market maker: "This market is not organized by a SEC certified credible market maker. Consequently it may not be possible to sustain the liquidity of the assets being traded. Holders must recognize that they may find that their position in these markets can be frozen and they may be unable to liquidate their holdings for cash."
Furthermore, the SEC should set up strictly enforced rules regarding the minimal amount of financial resources relative to the size of the relevant market that an entity must possess in order to be certified as a credible market maker. The SEC will be required to re-certify all market makers periodically , but at least once a year.

2. Prohibition against securitization that attempts to create a public market for assets that originated in private markets - The SEC should prohibit any attempt to create a securitized market for any financial instrument or a derivative backed by financial instruments that originates in a private financial market (e.g., mortgages, commercial bank loans, etc)

3. Congress should legislate a 21 century version of the Glass Steagall Act. The purpose of such an act should force financial institutions to be either an ordinary bank lender creating loans for individual customers in a private financial market, or an underwriter broker who can only deal with instruments created and resold in a public financial market.
Paul Davidson

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Dr. Davidson is the Editor of the Journal of Post Keynesian Economics and member of the Editorial Board of Ekonomia. He is the author, co-author, or editor of 22 books. He is the author of over 210 articles. His research interests include: International monetary payments and global employment policies; monetary theory, income distribution, energy economics, demand and supply for outdoor recreation, Post Keynesian economics. Dr Davidson is listed in Who's Who In Economics, Who's Who In The East, Who's Who In The South and Southwest, American Economists of The Late Twentieth Century, Dictionary of International Biography, Men of Achievement, and Contemporary Authors.

Holly Chair of Excellence in Political Economy, Emeritus, University of Tennessee, Knoxville

* Ph.D. - University of Pennsylvania
* M.B.A. - City College of New York
* B.S. - Brooklyn College

Footnote 1

The Home Owners' Loan Corporation (HOLC) was a New Deal agency established in 1933 by the Homeowners Refinancing Act under President Franklin D. Roosevelt. Its purpose was to refinance homes to prevent foreclosure. It was used to extend loans from shorter loans to fully amortized, longer term loans (typically 20-25 years). Through its work it granted long term mortgages to over a million people facing the loss of their homes.
The HOLC stopped lending circa 1935, once all the available capital had been spent. HOLC was only applicable to nonfarm homes, worth less than $20,000. HOLC also assisted mortgage lenders by refinancing problematic loans and increasing the institutions liquidity. When the HOLC ended its operations and liquidated assets in 1951, HOLC turned a small profit.[1][2]
HOLC is oft-cited as the originators of mortgage redlining. Recent research has suggested that the institution itself did not redline or discriminate on the basis of borrowers' race and ethnicity. The racist attitudes and language found in the appraisal sheets and Residential Security Maps created by the HOLC likely gave federal support to existing private sector bias and racial antipathy (Crossney and Bartelt 2005; Crossney and Bartelt 2006).
Wiki

Footnote 2

The Glass-Steagall Act of 1933 established the Federal Deposit Insurance Corporation (FDIC) in the United States and included banking reforms, some of which were designed to control speculation.[1] Some provisions such as Regulation Q, which allowed the Federal Reserve to regulate interest rates in savings accounts, were repealed by the Depository Institutions Deregulation and Monetary Control Act of 1980. Provisions that prohibit a bank holding company from owning other financial companies were repealed on November 12, 1999, by the Gramm-Leach-Bliley Act, which passed the U.S. Senate in one form on a party-line vote of 54 (53 Republicans and 1 Democrat) to 44 (all Democrats) and on a 343-86 vote in a different form in the House of Representatives, before being resolved by a joint conference committee; the conference report was approved by both houses of Congress (Senate: 90-8-1, House: 362-57-15) and signed by President Bill Clinton.[2][3] wiki

Hugh Wood, Esq.
Wood & Meredith, LLP
3756 LaVista Road
Suite 250
Atlanta (Tucker), GA 30084
www.woodandmeredith.com
hwood@woodandmeredith.com
www.hughwood.blogspot.com
Phone: 404-633-4100
Fax: 404-633-0068

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Old TARP: Banks Want The Old Bailout Back

Two months after Treasury Secretary Henry Paulson pulled the plug on his plan to buy troubled mortgage assets, the financial industry is pushing the government to reconsider.

Since the Troubled Asset Relief Program, or TARP, took effect in October, Treasury has spent $267 billion buying preferred stock in financial institutions and auto companies, the agency said Thursday.

Paulson has said the capital infusions have stabilized the financial sector.
But the economy has taken a sharp turn for the worse in recent months, as credit has become less available and companies and consumers have cut back on their spending.
Meanwhile, U.S. banks continue to hold hundreds of billions of dollars of mortgage-backed securities that, if downgraded, could lead to another round of damaging writedowns.
That's why some observers want the Treasury to return to the premise of the original bailout and move toxic assets off banks' balance sheets.

New TARP has failed, bring back TARP classic
Leading the charge for a return to what some might refer to as "TARP classic" is SIFMA, the Securities Industry and Financial Markets Association trade group that's based in Washington.
"We need to get the markets moving again," said Tim Ryan, SIFMA's CEO. "We have no problem with capital injections, but if you do capital injections without taking care of the bad assets, it just causes the problem to go into hibernation."

Ryan is a former Treasury official and onetime director of the Resolution Trust Corp., or RTC. The RTC oversaw the cleanup of the savings-and-loan crisis in the early 1990s. Ryan said the lesson he took from that experience is that the only way to make sure banks start lending again is to get rid of the bad assets.

Others share that assessment. The Organisation for Economic Co-operation and Development said in a paper issued this week that a study of financial crises over the past three decades suggests that isolating bad assets is a key to a successful response to a major market meltdown.
And the congressional panel overseeing the TARP wrote Friday in a report to Congress that events such as November's federal bailout of Citigroup (C, Fortune 500) highlight how the toxic asset problem has continued to fester.

Citi received $25 billion of TARP money in October. But despite Treasury's insistence that banks receiving TARP funds were healthy, Citi shares promptly plunged.

That forced the government to come to its rescue for a second time in November, with a $20 billion preferred stock injection and a $306 billion loan guarantee.

"These events suggest that the marketplace assesses the assets of some banks well below Treasury's assessment," the panel, chaired by Harvard professor Elizabeth Warren, concluded.
Of course, simply acknowledging the toxic asset problem doesn't make fixing it any easier. Critics of the original TARP questioned how the government would arrive at prices for assets that lack liquid markets, and Ryan conceded that pricing will present a challenge. But he said the government is the only entity with the scale to solve it.

"We all know pricing is going to be difficult," Ryan said. "But until we know what these assets are worth and get some transactions going, we're going to be stuck right where we are."
Bad assets aren't going away

Brian Olasov, a managing director at law firm McKenna Long & Aldridge in Atlanta who has worked on Wall Street and in commercial real estate lending, agreed.
"The RTC was imperfect, but it played an important role in getting markets going again," said Olasov. "What it ended up doing was developing a pricing technology for nonperforming loans, and that's the role the government could play again."

Not everyone buys the RTC analogy, though. Bill Isaac, who was the chairman of the Federal Deposit Insurance Corp. from 1981 to 1985, said the RTC simply replicated the FDIC's bank-resolution process.

He said the RTC was an appropriate response to the mass bank failures of the 1980s - more than 3,000 institutions failed during that decade, he said -- but he questioned how that experience translates to the present day.

"I think the whole bit about buying assets is highly impractical," said Isaac, now the chairman of the Secura Group bank consultancy in Sarasota, Fla. "The pricing issues are practically overwhelming."

A related problem stems from the uncertain health of the banks. Markets for distressed securities are locked up, observers said. That's partly due to banks not wanting to sell at the prices being offered because doing so would oblige them to take additional writedowns against their capital.

"The problem is that you don't know how deep the hole is for the banks," said Michael Bleier, an attorney at Pittsburgh law firm Reed Smith who oversaw the 1988 restructuring of Mellon Bank, a predecessor to Bank of New York Mellon (BK, Fortune 500).

Money could be an issue too. While $350 billion more in TARP funds are available to Treasury upon congressional approval, House Democrats have signaled in recent days that the toxic asset program isn't their top priority.

Rep. Barney Frank, D-Mass., introduced legislation Friday that calls for the Treasury to spend at least $50 billion starting in April to cut foreclosures.
Frank, the chairman of the House Financial Services committee, said congressional leaders have been consulting closely with the Obama administration.

He also laid out additional restrictions on recipients of TARP funding and called for closer oversight of the program. But he did not mention any plans to address toxic assets.
Whatever the priorities in Congress, the bad asset problem isn't going away. Oppenheimer analyst Meredith Whitney warned in a report this week that she expects downgrades of mortgage-backed securities to hit bank profits in the soon-to-be-reported fourth quarter of 2008 - and to force the banks, which have already sold hundreds of billions of dollars in stock, to raise more capital.

Despite the shifting winds in Washington and the lack of attention the toxic asset problem is currently getting, Ryan said he remains hopeful that legislators and administration officials will take appropriate action.

"We've been talking to all the right people, and they've been listening," Ryan said. "We think this new group can see the need to act." Colin Barr, senior writer, Fortune, Jan 9, 2009.

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Depression? Its not 1931. Its 1694. Really!

Bank of England Founded 1694

Oh! I have been so far off in my attempt to determine what financial year we are reliving in this present recession (depression). I have variously argued it is a repeat of 1937 (the last year Toyota posted a loss) and 1931 (the last year Wall Street fell close to 40% in one year.)

However, how far I was off and how desperate these financial times must be.

Its not 1937; its 1694. I thought that was a typo. But no, we have to go back to 1694 to find these interest rates at the Bank of England.

We have to go back to 1913 (the founding of the US Federal Reserve) to find a collapsed rate.

We have to go back to 1882 to the founding of the Bank of Japan (at the end of the to Meiji Restoration) to find anything close to today’s rate. In fact, there is no rate in history near the current 0.001% interest rate presently offered by the Bank of Japan. Why have an interest rate at that return?

1694? Really. It was the year Voltaire was born. Born - not died.

Perhaps, given the last 700bn the feds just floated, the automaker bailout and the 1.35T stimulus package proposed by Barak Obama, Voltaire’s quote was prescient.

"In general, the art of government consists of taking as much money as possible from one class of citizens to give to another. " Voltaire

CNN's poll today asked its readers when they thought the economic downturn would break. To my astonishment, and perhaps horror, 61% of participants said it would not end until after Obama served four (4) years.

Some clients have asked me (I'm not their financial advisor) what they should do now. Some have lot millions of dollars in their stock portfolios. For the first time in my entire life, I now argue that they should sit on the sidelines in cash. For a while (and this is not market timing) they should just watch common stocks. True, stocks have gone up every year from the 1930s to the present (well, near the present). However, this data is/are [pick whichever Latin plural floats your boat; both are now considered standard] showing that the current downturn is not a normal post WWII financial downturn.

We have never seen this downturn before in our lifetime. We have to look backwards 315 years to the founding of the Bank of England to find a similiar financial time.

Welcome to a voyage into the financial unknown.

& & &

Hugh Wood, Esq.

Wood & Meredith, LLP

3756 LaVista Road

Suite 250

Atlanta (Tucker), GA 30084

http://www.woodandmeredith.com/

hwood@woodandmeredith.com

http://www.hughwood.blogspot.com/

Phone: 404-633-4100

Fax: 404-633-0068

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UK interest rates cut to lowest Rate Since 1694
Bank of England cuts interest rates to lowest level in bank's 315-year history
Jane Wardell, AP Business Writer
Thursday January 8, 2009, 11:37 am EST

LONDON (AP) -- The Bank of England on Thursday cut interest rates to the lowest level in its 315-year history, taking it into uncharted territory as it attempts to ward off a prolonged recession.
The half point cut in interest rates -- to 1.5 percent -- sees the central bank nearing the limits of conventional monetary policy after trims totaling 3.5 percentage points since the beginning of October and as Britain faces its bleakest year since the early 1990s recession.
The bank's nine-member monetary policy committee said the world economy "appears to be undergoing an unusually sharp and synchronized downturn."
"Measures of business and consumer confidence have fallen markedly," it said in a statement accompanying its decision. "World trade growth this year is likely to be the weakest for some considerable time."
The half a percentage point cut was less dramatic than the 1.5 point trim it announced in November, and lower than the 1 point cut expected by some economists -- but still brings the rate down to the lowest level since the Bank of England was founded in 1694.
The move follows aggressive cuts by other central banks. The U.S. Federal Reserve has already slashed its key interest rate to a record low, at a range of zero to 0.25 percent, while the Bank of Japan has dropped its rate to almost nothing, at 0.1 percent.
The Bank of England's latest decision widens the gap between Britain and the euro zone, where the European Central Bank also recently cut rates to the current 2.5 percent. The ECB is now facing increasing pressure to plump for a larger downward move when it announces its monthly decision on Jan. 15.
But analysts warned that the expected future cuts both in Britain and the euro zone will have an increasingly diminishing effect.
"There is no doubt that further rate cuts will take place in the coming months, and we expect to see base rates at around 0.5 per cent by the summer," said Ben Read, an economist at the London-based Centre for Economics and Business Research. "However, with rates now at an all-time low, the marginal impact of any further rate cuts will be minor."
That leaves Britain facing a difficult period of slow or stagnant economic growth and potential deflation.
House prices have suffered their worst year on record, the huge services sector is shrinking at record pace and several major retailers have collapsed as consumers curb spending.
A warning in the Bank of England's latest credit conditions survey that lending to households and businesses is set to fall further in the first quarter of this year is likely to lead to more house price falls, corporate failures, and rising unemployment.
After a period of surging inflation -- inflation is currently running at 4.1 percent -- policy makers are now more worried about inflation falling below the government's 2 percent target or turning negative. Deflation, a sustained drop in prices, can be disastrous for an economy by discouraging people from spending as wages fall and unemployment rises.
Whether the lower rates will have the desired impact of jump-starting the economy is debatable, as many banks and other lenders have been slow to pass on previous cuts.
Nationwide, the country's biggest building society, has already said it plans to invoke a "collar" clause enabling it to stop reducing rates on most of its tracker mortgages, which are designed to follow the benchmark interest rate.
In contrast, banks have been quick to pass on the lower rates to savers, who have watched the value of their nest eggs decline in real terms. Lower savings are unlikely to encourage consumer spending and impede mortgage lenders' ability to attract deposits.
"The market is still not functioning properly and is likely to lead to a fragmented approach by lenders, as they try to balance the interests of savers and borrowers and other pressures on their businesses, in responding to today's announcement," said Michael Coogan, director-general of the Council of Mortgage Lenders.
The pound rose after the announcement to 89.28 pence per euro and $1.5181 as the cut fell short of the larger cut expected by many economists. Cutting interest rates can undermine a currency as investors seek higher returns elsewhere.
Meanwhile, Treasury chief Alistair Darling moved to quash speculation that the government was planning to print money to ease the impact of recession after he told the Financial Times in an interview published Wednesday that he was considering a policy of "quantitative easing."
"Nobody is talking about printing money," he told reporters after a Cabinet meeting on Thursday. "There's a debate to be had about what you do to support the economy as interest rates approach zero, as they are in the United States. But for us that is an entirely hypothetical debate."
Prime Minister Gordon Brown has said that with interest rates close to zero, the government should take fiscal action, hinting at further tax cuts and increased government spending

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