The Kanjorski Amendment Trojan Horse and Prompt Corrective Action

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.

Kanjorski Amendment Nov 2009

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:

(1) 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.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. Doug Terpstra

    Oh, Orwell had no idea. To the Ministries of Truth and Peace and Justice he would have added the Ministry of Financial Integrity to rule them all. If only this farce were Woody Allen fiction.

    Is Kanjorsky stunningly naive or abysmally corrupt? He says, “It’s a natural drive of capitalism to escape control and escape regulation and to keep growing to any size.” He might have added, “This is achieved most effedtively through the outright purchase of legislators whose souls are for sale.”

  2. ab initio

    What! Someone expected any different???

    Regulatory and political capture is so embedded that unless there are millions of people in the street who see through the facade demanding clear as daylight transparency we will only get more and more kabuki.

  3. Trainwreck

    Oh I wish it would be easier to call a constitutional Convention to rewrite our outdated constitution, but alas the only two ways to do that are impossible hurdles. Congress won’t do it, neither will the states. At least as long as the states are beholden to Congress.

    There are so many issues alive today that seemingly can’t be resolved without a dissolution of the union.

  4. Trainwreck

    Oh and I say this again, I think that health care reform is a “wag the dog” attempt by the financial industry to keep financial reform off the front page. How many more months shall Congress debate healthcare and not financial reform?

  5. attempter

    By now I assume any alleged “reform” is really a gambit of disaster capitalism which really seeks to further entrench already entrenched rackets.

    (Is the Audit the Fed amendment an exception? I haven’t yet heard of any Trojan horse there, at least. Certainly the Watts amendment, which the NYT’s “journalist” Andrews happily called a “compromise”, was really meant to gut even what meager existing oversight there was.)

    As for this Kanjorski, since I remember him best for bullying the FASB, I always assumed he was up to no good here as well.

    Of course, even without this reactionary provision, this amendment would still be completely insufficient if all it did was to allow the seizure of an already tottering mega-structure. It would just be another phony proposal that doesn’t get to the heart of things and would prove inadequate or be politically overridden in a crisis.

    The necessary reform here is to pre-emptively break up ALL the TBTF structures.

  6. john bougearel

    The name Kanjorski gets my ire up ever since he ramrodded the elimination of FV accounting in March 2009. (Yes it saved the financials and by extension the stock market, but who cares, really, given the social costs)If one did not know by then he would do anything buy uphold the long term public interest, it was then. So to see him ramrod loophole legislation to eliminate the gov’t’s TBTF doctrine that is toothless in substance but full of soundbite for public consumption comes as no surprise.

    But Yves controlled use of alliteration at the end of this post belies an anger and rage we all feel at the type of superficial meaningless reform we are getting from this congress and administration.

    It makes me sick.

    A clear distinction needs to be made between this congress and administration from the Congress and administration of 1933-1934. Back then, Congress passed legislation that would serve to protect the public for two generations. This Congress, serves to protect the financial industry in perpetuity and at the public expense.

    This admin and Congress thoroughly disgusts me, and when the next inevitable crisis that comes along that thoroughly guts and divides this country in two to the point of revolution, well, then I can only say that I hope the revolution succeeds beyond our wildest dreams and that today’s policymakers of our next demise are held more than just ccountable, but scapegoated to the point of being tar and feathered, Guantanamo’ed, seeing their heads on a stake, tried and convicted as warlocks and burned at the stake…

    And Kanjorski no doubt will claim that through this legislation he is doing God’s work for the American public(even if it be more than a bit devilish)

  7. Economics of Contempt

    This post is utter nonsense.

    The judicial review provision that Ed Harrison cites allows financial institutions to challenge the “mitigatory actions” listed in the Kanjorski amendment (pp. 3-4), not PCA requirements. It has nothing to do with Prompt Corrective Action, which is a completely separate legislative regime.


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