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

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

Remember, in Sarbanes-Oxley,58 another intervening event between Basel I and now when we're putting Basel II in; now there's personal liability for boards and consultants. Ask yourself what you have to do to proof up section 40459 control procedures with the model. Think about it. Who in the world is certifying the validity of each one of those formulae in Pillar One?60 Who is taking the board and saying, "We have done the control test, and it is in order." Who is vouching to the CEO that, yes, it's okay when you sign your certification that this whole model on which eventually you're going to run this bank on, that it's in order?

This morning's panel already talked about the complexity of the model.61 I'm concerned about the disconnect between the model builders and the bankers. The people building models are not the people who are going out making customer calls. They're a different breed of human being. I was with some general counsels who were saying, "We don't understand the guy building our model." Now I thought he meant he was too mathematical. He said, "No, no, no; he's in this other nation. We literally do not understand what he is saying to us when we talk on the phone." A second general counsel said, "Oh my God, that's our guy too." Which led us to a sort of Walter Mitty62 view that there's some guy sitting in some little village somewhere saying, "They're paying me hundreds of millions of dollars for, I don't know what. I send them these models, these equations, and they pay me this money, and it is fine. And then they asked me a few questions, I answer. They know what I'm saying, and they say, 'Well, thank you. That's very good.'"

I'm overstating it just a bit because the CEO, the CFO, everyone who ultimately is running the bank has got to understand what is going on in this data. They know, if they're seasoned bankers, where there have been problems in the past. They know where their particular bank, with this particular business model, with its strengths and its weaknesses, is going to be under stress. Are they really interacting properly to say, "Look, you know, we're really heavy in this area, but we're really not sure about it. We're the new entrants. So we're getting the less sophisticated customers, the riskier customers. We know that." Assuming they're being honest with it internally, in a closed-door meeting-is that really being translated to the people building this stuff?

I have a slide called, "Pillaring on."63 You've heard a lot this morning about models, Pillar One.64 Pillar Two, people bandy about.65 You see, we have supervisor intervention. Are we really saying we want a situation where Pillar Two gets activated? Is that really our line of defense, where the regulator out of the blue says, "I'm worried; your neighbors are getting in trouble; I want to double your capital today." Do you understand how terrifying that directive from the regulator is going to be? I lived through several banking crises where the boards were told that. The boards were running reasonably decent banks and were told the economy is getting bad and several of your neighbors have gone under. We're just demanding that you raise your capital. And we argued with them; we said "arbitrary and capricious" and all that, but at the end of the day you don't argue with your regulator that much. You try to do it.