By Edward Harrison of Credit Writedowns
Two weeks ago as the Financial Reform Bill was wending its way through Congress, Paul Kanjorski emerged as the champion of breaking up too-big-to-fail financial institutions. After seeing trillions of dollars in taxpayer money go to backstopping, propping up and guaranteeing the liabilities of weak financial institutions, It looked like we were going to see some draconian action.
On Nov 11th, the Wall Street Journal reported:
Rep. Paul Kanjorski (D., Pa.), a top lawmaker on the House Financial Services Committee, plans to offer an amendment to the bank-regulation bill currently before Congress that would allow the government to take preemptive steps limiting the size, complexity or risk of any financial company. Officials could intervene if specific conditions are met that signal a company poses a threat to the economy.
"I see it as one of our potentially last chances to get control, particularly of financial institutions in their mega-forms, before they take over the world," Rep. Kanjorski said. "It’s a natural drive of capitalism to escape control and escape regulation and to keep growing to any size."
The Congressman got his way and the Kanjorski Amendment to the the Financial Stability Improvement Act passed late last week with a vote of 38-29. Congressman Kanjorski was satisfied with the result. After the vote, he opined:
Looking forward, we have the capabilities to try to act in a preventative manner for the sake of every American and our economy. Most of us yearn for the day when the phrase ‘too big to fail’ is no longer a part of our vocabulary. Through responsible action advocated in this amendment, we can make that a reality.
But, wait one minute. Is this really the holy grail of financial stability and improvement? Of course it isn’t. In fact, it makes things worse. On page 7 of the Kanjorski Amendment, there is an enormous loophole that virtually eliminates the ability of regulators to take prompt corrective action in seizing and shutting down a bankrupt financial institution.
Here’s what the bill actually says:
(h) JUDICIAL REVIEW.—For any plan required under this section, a financial company subject to stricter prudential standards may, not later than 30 days after receipt of the Council’s notice under subsection (e)(5), bring an action in the United States district court for the judicial district in which the home office of such company is located, or in the United States District Court for the District of Columbia, for an order requiring that the requirement for a mitigatory action be rescinded. Judicial review under this section shall be limited to the imposition of a mitigatory action. In reviewing the Council’s imposition of a mitigatory action, the court shall rescind or dismiss only those mitigatory actions it finds to be imposed in an arbitrary and capricious manner.
Translation: we the bankrupt financial institution can sue in court to stop our being shut down by regulators. Hello litigation. Bye bye, prompt corrective action.
This is a Trojan horse.
That is huge because it means a weak bank can carry on in zombie form indefinitely, acting like a cancer to the whole banking system while the process makes its way through our court system.
The present law of our land mandates that regulators immediately shut down a weak institution with no recourse for suit until after seizure has occurred.
Here’s how Bill Black describes this:
The PCA law states its sole, express purpose:
The purpose of this section is to resolve the problems of insured depository institutions at the least possible long-term loss to the Deposit Insurance Fund. (1831o (a) (1)).
The administration’s duty, under the rule of law, is to administer the law to achieve that purpose. Prompt receiverships “resolve the problems” of insolvent and failing banks “at the least possible long-term loss.”
Because the problem prompting passage of the PCA law was supervisory delay in closing insolvent banks, the law mandated “prompt corrective action.” This, of course, need not mean receivership for troubled banks that can promptly recapitalize themselves by raising equity. The mandate to the regulators is that either the bank or the regulator must promptly correct the capital inadequacy.
In 1991 the Congress moved to limit taxpayer exposure to losses at failed banks with the passage of FDICIA. The PCA provisions of FDICIA create a structured system of supervisory responses to declines in bank capital, culminating in the bank being forced into receivership within 90 days after its tangible equity capital dropped below two percent of total assets. (pp. 11-12)
Be under no illusion, there is zero reason for this language to have been inserted except to protect banks from seizure. The whole thing is so farcical as to be comical. And this is not the only way in which financial reform is being gutted.
Witness comments by Dean Baker in the Guardian.
If the goal were to fix the financial system, then the process would not be difficult. But the halls of Congress are infested with financial industry lobbyists. As a result, the bills being put forward are written like the adjustable rate subprime mortgages that helped get us into this mess. The wording often leads to bills that do the exact opposite of the stated meaning.
For example, the wording of a section of the house financial services committee bill that was intended to regulate derivatives trading included an "end user" exemption. This exemption would have given Enron a green light to carry on its shady dealings in over-the-counter transactions out of sight of any regulators.
Again, farcical. This is why I wrote earlier about Americans losing faith in government. This government is entirely captured by special interests. These reform bills are for show and nothing more. How did Woody Allen put it in his opus to Banana Republics?:
It’s a travesty of a mockery of a sham of a mockery of a travesty of two mockeries of a sham.
You can now return to your bread and circuses
William K. Black on The Prompt Corrective Action Law – Bill Moyers Journal
Vampire banks rise again – Dean Baker
Note: Recent conversations with fellow blogger Rolfe Winkler of Reuters make plain to me that he was an original source for much of the analysis that goes into this. Hats off to Rolfe. Expect to see a link at Credit Writedowns to his post on this issue when he puts it out.