Analysis

Ex-Fed GC Says Lessons Of 2008 Helped With COVID-19

By Sue Reisinger
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Law360 (October 28, 2020, 7:11 PM EDT) -- The lessons learned in the global financial crisis of 2008 allowed Congress and financial regulators to move faster and with more precise measures to boost a wavering economy brought on by the coronavirus pandemic, a panel of legal experts said Tuesday.

Attorney Thomas Baxter Jr., who was general counsel of the Federal Reserve Bank of New York during the financial crisis, said one important element of both emergency situations was the "healing power" of the special purpose vehicle, a legal entity that acts as a funding structure for businesses in need.

The Fed typically forms such an entity as a Delaware limited liability corporation and uses it to move money from its programs to distressed companies.

In 2008, different LLCs bought assets from Bear Stearns and AIG and later resold them. And earlier this year, the Fed created vehicles to move loans from a primary market credit facility to large corporations, as well as loans to smaller businesses through its Main Street Lending Program. Terms of the deals vary with each vehicle.  

Baxter, now with Sullivan & Cromwell LLP in New York, helped push the special vehicle idea in 2008 to save failing financial institutions, and he advised clients about their use this year as COVID-19 threatened the economy.

He was one of five experts who spoke at a Rutgers Law School forum titled "Ten Years After the Dodd-Frank Act: Looking Back and Looking Forward," the first in a virtual symposium series.

Baxter also emphasized the "unheralded feature of Dodd-Frank": the building of risk management into the governance frameworks of financial institutions.

Institutions "need to be equipped to address the financial effects of economic shock," he said. "I presume you will not be able to predict the nature of every trigger that will provoke an economic shock."

Another speaker, professor Kathryn Judge of Columbia Law School, an expert on financial markets and regulation, said there are three key differences between the 2008 crisis and the current coronavirus crisis.

"First was the nature of the shock," she said. "In the last crisis, there was an endogenous buildup of risk that threatened the health of the economy. Here, the shock was exogenous — a pandemic that no one saw coming."

Second was the speed of the response, she said. The financial crisis began to build in 2006, became clearer in the summer of 2007 and reached its peak in the fall of 2008.

The Fed met regularly and tried some innovative moves, Judge said, but because of uncertainty, about 13 months passed before it took drastic action in late 2008, and Congress didn't act until even later.

In contrast, when the first wave of the coronavirus hit in March, immediately putting people out of work, Congress reacted far more quickly, voting for fiscal stimulus directly to individuals and businesses along with expanded unemployment benefits.

Judge added that the "Fed was far more aggressive [and] stepped in quickly cutting interest rates," while providing credit facilities modeled from the 2008 crisis along with new ones.

"The economy looks very different this time around," she said. "I never would have guessed that the Fed could come in as quickly and aggressively as they did."

Thanks to capital requirements under the Dodd-Frank Act, Judge said banks went into the COVID-19 crisis much better capitalized than in 2008.

But she warned: "We are still facing a significant economic crisis that may yet evolve, but it is not yet a serious one."

Another panelist, Charles Yi, a partner at Arnold & Porter in Washington, D.C., spoke of the difficulty of getting Dodd-Frank and other bills passed amid the financial uncertainty and deep anger at the banking industry across the U.S.

Yi previously served as general counsel of the Federal Deposit Insurance Corp., chief counsel to the Senate Banking Committee, and deputy assistant secretary for banking and finance at the U.S. Department of the Treasury. In the latter two roles, he played a key part in creating and implementing Dodd-Frank.

A big difference Yi sees between the two crises is that last time, "Congress was asked to vote to make everyone pay for people who burned their own houses down" — that is, bail out the banks.

This time, however, "Everyone agreed this was an asteroid hitting the Earth, and we could agree on how to respond."

Others on the panel were moderator Jarryd Anderson, a senior counsel at Wells Fargo & Co. and a former policy adviser to the Board of Governors of the Federal Reserve System; James P. Bergin, deputy general counsel of the New York Fed and former chief of staff to New York Fed President William C. Dudley; and William Bratton, professor at the University of Pennsylvania Law School and co-director of its Institute for Law and Economics.

--Editing by Philip Shea and Jill Coffey.

For a reprint of this article, please contact reprints@law360.com.

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