FEDERALIST SOCIETY FINANCIAL SERVICES PRACTICE GROUP[dagger]: PANEL DISCUSSION: "THE IDEAL BASEL", THE

Fordham Journal of Corporate & Financial Law, 2008 by Fisher, Keith R

PANEL DISCUSSION

KEITH FISHER: The title for this panel is "The Ideal Basel." The Swiss might say, "Basel de Ideal." As we heard, Basel is an interesting multinational framework that gives rise not only to capital standards,6 but also to recommendations when it comes to AML7 and antiterrorism and other things, many of which are of an aspirational character.8

One of the things that I noticed as I was listening to Senator Hagel9 was that we have a bit of a luxury when it comes to Basel II.10 Unlike crisis modes that gave rise to legislative packages like Sarbanes-Oxley," like the Patriot Act,12 like FIRREA13 in 1989, we have had the luxury of a largely uninterrupted spate of prosperity for banks during practically the entirety of the Basel I regime.14 So, there is no particular urgency in jumping into anything. If we're going to move into Basel II,15 in whatever format,16 we certainly want to try to get it as right as we can from the outset. Our panelists today will help us in that process by offering their thoughts and suggestions on how the current proposals17 might be improved, might be tinkered with, what are the strengths and weaknesses, and so forth.

On the description of the panel, we see a variety of topics, including possible competitive distortions between banks of different sizes,18 domestic-focused banks versus international-focused banks,19 and various types of risks.20 I noticed that nobody mentions political risk in any of these lists of different types of risks, and yet if we're talking about internationally active banks, our U.S. experience in many overseas loans certainly indicates that political risk would be something that we would at least want to keep in mind as well.21

On today's panel we have Michael Roster, Karen Shaw Petrou, Wayne Abernathy, and Charles Taylor. They will present in that order, and it is my pleasure to introduce each of them, which I will do seriatim.

I've known Mike Roster for over twenty years. We've both been active in the business law section of the ABA22 and the banking law committee. He has had a very interesting career, not only in banking and S&L23 regulation but also in healthcare and higher education law. Until recently, he was Executive Vice President and General Counsel of Golden West Financial Corporation-World Savings, which grew to a $130 billion organization that was ultimately acquired by Wachovia in late 2006.24

Earlier in his career, Mike was a partner in Morrison & Foerster's Los Angeles office, where he was active in the firm's financial services practice and the co-chair of the practice. Between 1993 and 2000, Mike did a stint as General Counsel of Stanford University, Stanford Medical Center and Stanford Management Company. He's been active in the Association of Corporate Counsel and with various startups both within and without the financial services sector.25

So, please welcome Mike Roster.

MICHAEL ROSTER: Thank you.

The Ideal Basel is probably one, first of all in my mind, that management, boards of directors, regulators and the markets understand. If they don't understand it, it's a disaster. I'm talking as one who has also been a director of several banks, an outside director, and I have counseled boards as an outside lawyer. There is no better out-of-body experience than suddenly being the recipient of the advice you used to give-and to sit there and realize all the things you used to say are the things you're supposed to do-and suddenly realize something is not happening. What is management presenting? What is this about? How long do you ask questions before it's impolite, but how long do you have to keep pushing it so that you have a record that will sustain scrutiny someday?

The Ideal Basel is also one that works, that will not have horrible "whoopsies" after the fact. Now, I've given you a handout,26 unfortunately it's fairly small in text, but you'll be able to see it. I think we've gone from an era of "too big to fail," which was what protected a number of our banks in the past. People forget that Citibank, Wells Fargo, and many others were once bankrupt.27 Had they not been as big as they were, they wouldn't have existed today, but they were too big to fail. We are now going into an era, we are in an era, of "too big to understand" or "too complex to understand." One of the things to test of a capital regime, whether it's Basel II or whatever it is-one has to understand it.

On one of the slides28 I presented just one of the pages of formula.29 I'm not an anti-math kind of guy. I used to like math. But you have to look at that and realize there are hundreds of pages of that. And if you're in the board room and you're presented that-if. By the way, this won't make it to the board room. By the way, it won't make it to the CEO. It won't make it to the CFO. It won't make it to almost anyone who is in the position of deciding what in the world is going on. It will stay at a middle-management level, and there'll be crisp, onepage memos saying, "All is going well, sir."