Transcript I Lost How Much PowerPoint Presentation

2010 PLUS International Conference
I Lost HOW Much?
Emerging Trends In
Financial Markets Regulation
The Round-Up…
MODERATOR:
• Cary Meiners, Practice Leader, Public Company Liability,
Travelers
PANELISTS:
• Ivan J. Dolowich, Esq., Partner, Kaufman Dolowich Voluck
& Gonzo LLP
• Wendy Dowd, CFA, Vice President/Worldwide Manager,
Asset Management, Chubb Specialty Insurance
• Atea Martin, Esq., Director of Claims, CNA Global Specialty
• Michael K. O’Connell, MBA, Managing Director, Aon
Financial Institutions Practice
2010 PLUS International Conference
Outline
• What Just Happened?
• Financial Securitization
• Dodd-Frank
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Key Elements
Scope and Effect
Underwriting Challenges
• Insurance Impact
• Emerging Exposures and The Net Effect
2010 PLUS International Conference
What Just Happened?
• Would More Regulation Have Prevented
This?
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Unemployment at 9.6%
Dow index down 22% from 2007 peak
S&P/Case-Shiller Index down 30% since 2006
4.7% of all mortgages in some state of foreclosure
1/3 of mortgage defaults related to second-home
investment properties
A “foreclosure freeze” which could slow
home sales
2010 PLUS International Conference
Banking Woes Continue
• From 2004-2007 only 3 bank failures
• Then - 25 failures in 2008, 140 in 2009,
139 YTD
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2010 bank failures are smaller in size
• Bear Stearns collapse and Lehman Brothers
bankruptcy filing in 2008
• Big banks may have to now buy bad loans
from investors: estimates range from
$20-$134 billion
2010 PLUS International Conference
What Just Happened?
Are Things Getting Better?
• Two views:
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Troubled Asset Relief Program (TARP)
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$700 billion initial infusion
♦
$340 billion expected cost in 2009
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Recent estimates as low as $30 billion in cost
Freddie Mac and Fannie Mae
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Worst case now projected at $259 billion
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Moderate case now projected at $154 billion
2010 PLUS International Conference
What Just Happened?
Has Systemic Risk Really Declined?
• One Measure is the use of Credit Default Swaps (CDS)
• CDS: Financial Weapons of Mass Destruction
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2002--- $2 trillion
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2007--- $62 trillion
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2010--- $25 trillion
2010 PLUS International Conference
What Just Happened?
• China Will Introduce CDS by Year End
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CDS: “Neither evil nor good”
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“No repackaging or restructuring of risk”
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“We learned a lot from Europe and the U.S., but
there were problems with some of the teachers”
• CDS: Benign or Still Very Risky?
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The SEC and the Commodity Futures Trading
Commission will decide this for all CDS players
2010 PLUS International Conference
Financial Securitization
• Current State of Securitization
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$1 trillion in bond securitization loss possible
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What is the future of securitization?
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Has this impacted D&O/E&O underwriting?
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Can D&O/E&O underwriting really address
this exposure?
2010 PLUS International Conference
Dodd-Frank and
Regulatory Empowerment
• Regulators Muscle Up
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SEC will issue 100 new rules for derivatives
trading, credit rating companies, stockbrokers,
hedge funds and corporate boards
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The Federal Reserve will write 50 new rules to
deal with systematic risk
2010 PLUS International Conference
Dodd-Frank and
Regulatory Empowerment
• FDIC
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Will set new capital rules for community banks
Will be responsible for liquidating troubled
financial companies
• The Treasury Department
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Will chair the Financial Stability Oversight Council
Forms a consumer protection bureau
2010 PLUS International Conference
Dodd-Frank and
Regulatory Empowerment
• Key Elements of Dodd-Frank
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Systemic risk/increased regulatory oversight
♦
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SEC enforcement expansion and whistleblower
provisions including:
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Too big to fail
Aiding and abetting
Morrison decision
Executive compensation
Hedge funds
2010 PLUS International Conference
Systemic Risk
• “Too big to fail”
• “Systemically important” financial firms to be
regulated by the Federal Reserve
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Large Interconnected Banks (>$50 billion assets)
Nonbank Financial Companies (TBD)
• Financial Stability Oversight Council (FSOC)
and the Office of Financial Research (OFR)
• Stricter capital, liquidity and other restrictions
• New FDIC liquidation powers
2010 PLUS International Conference
SEC Enforcement Expansion
Whistleblower Provisions
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SEC Enforcement Issues
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Lack of credibility (i.e., Madoff, Stanford)
New enforcement tools under Dodd-Frank
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Penalties can be assessed at administrative level
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Aiding and abetting
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Standard changed from “knowing” to “reckless”
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Control person liability
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Standards of conduct for broker-dealer
2010 PLUS International Conference
SEC Enforcement Expansion
Whistleblower Provisions
• Morrison Decision
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Implications for companies that issue shares on
foreign exchanges
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Defense strategies
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Response from the plaintiff’s bar
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Impact of Dodd-Frank
2010 PLUS International Conference
SEC Enforcement Expansion
Whistleblower Provisions
• Whistleblower Provisions
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Protection and monetary rewards for voluntary
suppliers of information to the SEC
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The resultant fine or penalty must exceed $1M
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Information must be independent and original
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Reward within SEC discretion but ranges from
10-30% of monetary sanctions
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Protection from public exposure or employer
reprisals
2010 PLUS International Conference
Executive Compensation
Executive Compensation Disclosure:
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Pay vs. Performance: SEC review compares 5-year stock performance
 Compensation Ratio: CEO versus Median of “Rank & File”
Compensation Committee
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Defined independence
 SEC review of member consultants/advisors
Shareholder Voting Rights
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More frequent proxy/authorization
Clawbacks
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Delisting of non-compliant issuers
 Accounting restatements
2010 PLUS International Conference
Executive Compensation Form
• “Say-on-Pay”
• Incentive-based compensation
• Independent compensation committee
• Clawbacks
2010 PLUS International Conference
Hedge Funds and Advisers
• Two objectives:
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Systemic risk
Investor protection
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New adviser registration requirement
New reporting and record-keeping requirements
“Statistically important” firms?
Changes to definitions “accredited investors” and
qualified client”
• Volcker rule
• New study – feasibility of forming SRO to oversee
private funds
2010 PLUS International Conference
Dodd-Frank
Scope and Effect
• A Closer Look at Key Provisions
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How far-reaching is this legislation?
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Does this legislation regulate “the unregulated”?
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Did compromise affect this bill too much?
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Any glaring weaknesses that should be fixed?
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How will insured procedures and behavior
change?
2010 PLUS International Conference
Dodd-Frank
Underwriting Challenges
• Coverage and Policy Language
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Key concepts to focus on
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Exclusionary language
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New coverages needed?
2010 PLUS International Conference
Dodd-Frank and
Regulatory Empowerment
• Backers Cite These Positives:
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Requires full and fair disclosure to credit consumers
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Mechanism for failed-bank receivership
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Requires more disclosure of derivative securities
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Banks must be “well-capitalized” and “well-managed”
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Debate about this?
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Amends SOX to allow small-company exemption
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Empowers the Financial Stability Oversight Council to seek
solutions to “systemic risk”
2010 PLUS International Conference
Dodd-Frank and
SEC Empowerment
• Critics note the following:
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No reinstatement of Glass-Steagall
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Banks can have hedge and equity operations to a
certain threshold
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Executive compensation limitations are modest
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Leverage ratios are not effectively addressed
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No new regulation on credit agencies
2010 PLUS International Conference
Pre-Dodd/Frank Regulatory Environment
Effect and Underwriting Impact
• Was regulation pre-Dodd/Frank effective?
• Did previous regulation dampen investor
confidence?
• If global companies avoided listing on the
U.S. Exchanges before, what will the
response be now?
• Were underwriters really thinking about
regulation until now?
2010 PLUS International Conference
The Net Effect: Problems and
The Regulatory Fix
• Will Dodd-Frank change D&O/E&O
underwriting?
• Can plaintiff attorneys find new niches?
• Could claim trends emerge slowly over time?
• How will the foreclosure freeze impact
insurance?
• Are policy changes or refinement needed?
• What is the market impact?
2010 PLUS International Conference
Questions
&
Answers
2010 PLUS International Conference
Many Thanks To…
• Cary Meiners
• Ivan J. Dolowich
• Wendy Dowd
• Atea Martin
• Michael K. O’Connell
2010 PLUS International Conference