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Why Is Geithner Continuing Paulson's Policy of Violating the Law? |
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Written by William K. Black Associate Professor, University of Missouri; Senior regulator during S&L debacle
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Whatever happened to the law (Title 12, Sec.1831o) mandating that banking regulators take "prompt corrective action" to resolve any troubled bank? The law mandates that the administration place troubled banks, well before they become insolvent, in receivership, appoint competent managers, and restrain senior executive compensation (i.e., no bonuses and no raises may be paid to them). The law does not provide that the taxpayers are to bail out troubled banks. Treasury Secretary Paulson and other senior Bush financial regulators flouted the law. (The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) are both bureaus within Treasury.) The Bush administration wanted to cover up the depth of the financial crisis that its policies had caused.
Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth. He was supposed to regulate many of the largest bank holding companies in the United States. Far too many of these institutions are now deeply insolvent because the banks they own are deeply insolvent. The law mandated that Geithner and his colleagues place troubled banks in receivership long before they became insolvent. Why are the banking regulators, particularly Treasury Secretary Geithner, continuing to disobey the law?
We need a Pecora investigation
We can understand now why the administration and so many committee
chairs are virulently opposed to the single most essential step we need
to take to diminish future crises -- a modern Pecora investigation.
Pecora was the prosecutor hired by the Senate banking committee to
investigate the misconduct that helped cause the Great Depression. You
must vigilantly study past failures to learn causation and to enact
remedies. If we were dealing with a crisis of airplane crashes and
someone opposed studying the causes of the failures we would
(correctly) label him a lunatic. Congress largely stopped conducting
meaningful oversight hearings of financial regulation during the Bush
administration. The results were horrific. It appears that only intense
public pressure will suffice to overcome congressional and
administration resistance to a Pecora investigation. I hope readers
will add their voices to this call.
The financial cost of Paulson's and Geithner's flouting of the law
Paulson and Geithner's refusal to comply with the law has already cost
the taxpayers scores of billions of dollars in unnecessary costs.
Geithner indicated Friday, February 20 that he would continue to flout
the law. If he is allowed to do so it will add hundreds of billions of
dollars to the eventual cost to taxpayers. The amount of taxpayer money
wasted due to Paulson and Geithner's violations of the prompt
corrective action law will exceed the total present value cost of
resolving the S&L debacle, $150 billion ($1993). The waste will
take the form of the U.S. taxpayers subsidizing the officers,
shareholders and subordinated debt holders of failed banks -- who are
disproportionately wealthy, frequently profited from the accounting
fraud that caused the banks to fail, and are often foreign. The prompt
corrective action law was passed in large part to prevent such a
subsidy.
The S&L debacle led to a new financial regulatory system premised
on "prompt corrective action" (PCA). Future posts will explain more
fully why this system failed, but it is remarkable that the system, the
phrase, and the law have disappeared from the coverage of the banking
crises. PCA's premise was that regulatory discretion led to cover-ups
of failed banks and excessive losses to the taxpayers. The PCA solution
was to require higher capital requirements and to mandate that the
regulators take over troubled banks before they deteriorated to the
point that the failure would impose a cost on the Federal Deposit
Insurance Corporation (FDIC). PCA also recognized that failing bankers
had perverse incentives to "live large" and cause larger losses to the
FDIC and taxpayers. PCA's answer was to mandate that the regulators
stop these abuses by, for example, strictly limiting executive
compensation and forbidding payments on subordinated debt.
PCA's purpose is "to resolve... problems... at the least possible
long-term cost to the [FDIC]." That means the least possible cost to
taxpayers. Secretary Geithner's priority is protecting private
shareholders:
We have a financial system that is run by private shareholders, managed
by private institutions, and we'd like to do our best to preserve that
system.... We have a law that says when banks are at or near insolvency
private shareholders should be eliminated unless we can arrange a
transaction that has no cost to the FDIC. Receiverships produce
"private institutions." The FDIC manages the failed institution only
long enough to get it in shape to be sold at the least cost to the
taxpayers. Receiverships end unnecessary bailouts of private
shareholders, reducing the cost to the FDIC, as the law requires.
Receiverships place banks back in the hands of new shareholders.
Geithner has so twisted the framing of this issue that he is warning
that a cheaper, more effective means of resolving failed banks used
under President Reagan is some alien form of socialism that President
Obama must slay before it destroys capitalism. Geithner is channeling
Rove when he conflates receiverships with "nationalization."
Secretaries Paulson and Geithner subverted the PCA law by allowing
failed banks to engage in massive accounting fraud (which also means
they are engaged in securities fraud). Treasury is telling the world
that resolving the failed banks will require roughly $2 trillion
dollars. That has to mean that the failed banks are insolvent by
roughly $2 trillion. The failed banks, however, are reporting that they
are not simply solvent, but "well capitalized." The regulators flout
PCA by permitting this massive accounting and securities fraud. Note
that by countenancing this fraud they make it extremely difficult to
ever prosecute these elite white-collar frauds.
--
http://www.huffingtonpost.com/william-k-black/why-is-geithner-continuin_b_169234.html
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