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| Banking Law Spring 1998 Final Exam |
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| Sunday, 03 December 2006 | |
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UNIVERSITY OF THE PACIFIC McGEORGE SCHOOL OF LAW BANKING LAW & REGULATION - PROFESSOR F. GALVES SPRING SEMESTER 1998 WEDNESDAY, MAY 6, 1996 FINAL EXAMINATION 6:15 P.M. -7:30 P.M. INSTRUCTIONS Please read the following instructions carefully: 1. You will have from 9:30 a.m. to 11:30 a.m. (Two hours total time) to complete this one-hour-and-a-forty-five minute exam. You may begin reading the exam and taking notes organizing your answer right at 9:30 a.m. Bluebooks will not be distributed until 9:45 a.m., so you will not be able to begin writing in the Bluebooks until 9:45 a.m. Use the 15-minute reading period (9:30-9:45) to collect your thoughts and begin organizing your responses. You may use the (2) two blank pieces of paper provided to write on as you organize your answers during the initial 15 minute reading period. 2. This is NOT an OPEN BOOK examination. Thus, no books or materials are allowed other than the following (2) two materials: (1) the Rulebook (NOT the Casebook)with any notes you have written in the margins, and (2) your personally written outline/checklist, (NOT any kind of commercial outline or printed material other than your own). 3. This examination is divided into (2) two parts (each part is weighted commensurate with the suggested time): PART ONE consists of one essay question with two subparts. Part One is a typical law school essay exam question. PART TWO contains (10) ten short-answer questions. Each of these questions can be answered in one to five sentences. These questions are designed to elicit very short answers which are concise, direct, and to the point. You either know the answer or you do not. 4. I suggest that you divide your time during the exam as follows (NOT COUNTING THE INITIAL 15 MINUTE READING/ORGANIZING PERIOD): For PART ONE, you should allot 75 minutes (one-hour-and-fifteen minutes) for this 2 sub-part essay question; For PART TWO, you should allot 30 minutes (one half hour) to complete this short answer section; this gives you an average of three minutes to read and answer each question. 5. Both parts of the exam will be distributed together at 9:45 a.m.; please return the Bluebooks and Exams at 11:30 a.m., unless you finish earlier. 6. STOP WRITING AS SOON AS THE PROCTOR CALLS TIME. Budget and keep your own time as the proctors will not tell you when to move on to the next question. PART ONE OF TWO PARTS (9:45 A.M. - 11:00 A.M.) [75 MINUTES-1 HOUR & 15 MINUTES] Just after finishing college, Mark Jones took a job as an investment broker on Wall Street in New York and worked there for 15 years. Last year, he got fired (he has been living off of unemployment benefits) for alleged stock price manipulation and overcharging, and for revealing insider information of a client. He was never charged or convicted on these allegations. His former boss believes that Mark was "just a convenient scapegoat" for certain of his supervisors. Mark's brother, Mike Jones, lives in Queens and owns a printing and copying business there that is on the verge of bankruptcy, although it is still barely solvent at this time. Mike cannot get a loan from any public or private source to help save his business and he is very concerned about his financial future. Mark and Mike have always wanted to start a business together, but have never had the occasion to do so. Mark and Mike's mother, "Big Mama Jones," is an 85 year-old eccentric who lives alone in a castle with 20 cats in upstate New York. She is quite wealthy: she has $50 million worth of IBM, Microsoft and GM stock, $1 million in savings, and she lives off of the dividends and interest (and her social security). Neither Mark nor Mike are mentioned anywhere in her will. Mark has come to you with an idea and is requesting your legal advice. He wants to open up some type of financial institution called the "Copy, Mail, Print and Bank Bank." He does not know what type of financial institution it should be or how it should be structured, but that is why he is consulting you. Mark tells you that he wants to be the President and Chairman of the Board of this institution, with his brother, Mike, as Executive Vice President and Co-Manager, and their mother, "Big Mama" as the Secretary, Junior Vice President and chief stockholder. According to the plan, Big Mama would put up $40 million in capital to start the institution (Mark would put in $5,000 and Mike would contribute $3,000-thanks guys). Mark says that the institution will take advantage of all three of their skills and assets. First, Mark wants to sell his own expert personal services advising customers on how to invest their money on the stock and bond markets and he eventually wants to use the profits made therefrom to reinvest on the stock and bond market on behalf of the institution, as well as invest part of his own salary. He also wants to sell insurance to his customer investors called "investor's insurance" that would insure those customers' investments in the event that they lose money on their investments. The premiums paid would fund any losses. He wants to call it the "You Can't Lose With Us" Program. Mark assures you that depositors would of course still be insured by the FDIC or other private insurance so that "neither depositors nor investors would lose money because they would be insured." Next, Mark wants the institution to provide copying, mailing and printing services, to take advantage of Mike's business expertise, but the sale of such services would be ONLY to the institution's pre-existing customers, and sold only when those customers are already waiting in the teller lines to do their regular financial transactions at the institution (no off the street business for people not waiting in line). In an effort to justify the plan, Mark had Mike do a very detailed marketing study of the neighborhood in which they want to locate on the Upper West Side in New York City, and found that there are hundreds of potential customers that said they immediately would switch from their current banks and do all of their banking at the proposed "Copy, Mail, Print and Bank Bank," provided those future customers could also get all of their mailing, overnight packaging, printing and copying done at the institution while they are waiting in line. Finally, Mark reiterates that Big Mama will put up $40 million to start the proposed institution and she therefore will own over 99% of all of the outstanding stock. He further states that she also is willing to contribute her last $11 million in capital in the future, if the proposed institution ever were to "really need it." Mark also says that Citibank already has agreed to lend to his proposed institution $60 million, at 35% interest, repayable in ten years, provided Big Mama agrees to guarantee the loan and provide all of her stock as collateral. The proposed institution, according to Mark's calculations, will start out with a little over $100 million in capital and debt. Of that initial $100 million-Mark proposes that $10 million immediately will go to the purchase of the branch facilities, an additional commercially zoned building for future expansion, and bonus start-up salaries to Mark, Mike and Big Mama, while the remaining $90 million in capital and debt would be used to issue high interest standby letters of credit to borrowers in California. Mark believes that providing high interest letters of credit is an easy way to make money because he says he will "issue standby letters to only the very best and most creditworthy individuals out there," so he will "never actually even have to advance any funds because those borrowers will not default on the underlying obligation in the first place-we'll make money on the interest, and away we go, baby--so what do you think?" You stare at Mark, for, what seems like an inordinately long while, you then take a deep breath, and say, "Mark, sit down, we have to talk seriously about your radical, yet ingenious, "Copy, Mail, and Print Bank Bank" proposal and you are not going to like it . . ." 1. What do you specifically tell him regarding each particular provision of his proposal/scheme, in terms of whether it complies with applicable banking laws and regulations? Include any necessary assumptions you are making and/or additional information you would need to answer fully. 2. What , if anything, could you propose in the alternative, in terms of structuring, that might achieve at least some of his stated objectives, or just get close to them, and still satisfy applicable banking laws and regulations? Include any necessary assumptions you are making and/or additional information you would need to answer fully. PART TWO OF TWO PARTS (11:00 A.M. - 11:30 A.M.) [30 MINUTES] 1. How did the "free banking era" help solidify the "dual banking system"? 2. From 1914 to 1933 the banking industry went through a major consolidation (mergers and acquisitions) of banks right before the disastrous failures of the Great Depression. Currently, the industry is consolidating like never before, what protections do we now have that would keep a new Great Depression from happening (would they be successful)? 3. What does "financial intermediation" mean? 4. What is an "acceleration clause" in a loan agreement and why can't it be used "offensively" by the lender? 5. Explain the difference between "FDIC-Receiver," "FDIC-Corporate," and "FDIC-Conservator." 6. Explain why the FDIC was concerned with "brokered deposits" in the late '80's? 7. What is a "yield spread premium"? 8. If a bank violates the CRA, who has standing to sue and what is the typical remedy? 9. What is the standard of an agency decision on appeal: "clearly erroneous," "de novo," "arbitrary and capricious," or something else? 10. What is "moral hazard"? |
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