Why Is Geithner Continuing Paulson's Policy of Violating the Law?
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.)
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for the existence of a law to influence behavior, someone with an inclination to bring suit has to have standing. dr. black indicates that Treasury has violated Title 12, Sec. 1831o. who would have standing to bring a case against them for violating this law?
I have much faith in Barack. But I have to admit that I am not real impressed with Geithner. I think Barack could have made a much better choice. I hope he proves me wrong. claudiatucsonaz
Perhaps the "change" brought about by having "elections" is nothing but an illusion, a cosmetic change.
The corporations have been buying politicians and writing policy for a long time. One of the reasons this continues to happen is that we have morphed into a nation of victims, and spend more time and effort "looking forward", rather than taking the time and effort necessary to correct the mistakes of the past. The other reason is that they can get away with it.
I totally agree, "elections" are nothing but an illusion. Democracy by, for and of the people really means you get one day every four years to vote for whomever deluded you the most. There is no real democracy in the home--it's a directorship, usually daddy. There is not democracy in the school-- it's a dictatorship, usually the teacher. There is no democracy in the workplace--it's a dictatorship, usually the3 boss. Top down never did and never will give us the chance to live life to the full--bottom up might ...if we could give it a chance.
So nationalize the banks already! Get it over with! Call it whatever you want: partial nationalization, temporary nationalization, socialization, liverwurst, or rutabaga. Just get it over with! This tortuous slow drip of on again, off again, stop gap measures is going to cost us more than if we executed the politically incorrect “N” word. Of course, a government takeover is the worst nightmare for many Republicans. But now that former Fed governor Alan Greenspan and many fiscal conservatives are on board, this shouldn’t amount to political suicide for Obama. The FDIC’s Sheila Bair already does this on an almost daily basis with smaller regional banks, like Washington Mutual, but for some reason the top nine “too big to fail” banks are sacrosanct. Their deposits have been effectively nationalized with government guarantees since last fall. The market is already selling us that many of these once hallowed institutions are now worthless. This is what Citigroup (C) at $1 and Bank of America (BAC) at $2 are telling us. Just wipe out the pitifully little the common shareholders have left, clean them up, and resell them in five years after the credit markets are restored. Every government that ever did this, like the UK in the eighties and Hong Kong in 1998, made a fortune. Not to drive a stake through the hearts of these de facto “zombie” banks really would risk a Great Depression II and an “L” shaped lost decade.
What a question about an Obama nominee confirmed quickly by Congress – Democrats and Republicans – like others who violated tax laws and were confirmed before they could withdraw.
Obama has continued some Bush policies - military actions in Iraq, Afghanistan and Pakistan killing and maiming more civilians. The results are not good judging from Afghanistan’s Karzai’s reactions and Pakistan arming a Swat Valley militia.
The results are not good on moving toward closing Gitmo, suspending trials of Islamic jihadists there, releasing some as Bush had, trying to decide what to do with others - those no country will take and that some will take and execute quickly.
I don’t expect good to come from Obama’s overtures and apologies to Iran’s Ahmadinejad, on Arabic TV, or order to SecState Clinton to resettle victims from the Gaza Strip with $20.5M or rebuilding the Gaza Strip. My expectations are based on Amadinejad’s, Libya’s Qadafi , Osama bin Laden’s and other Muslim’s reactions, Hamas intercepting aid to sell to the needy, contracting out rebuilding tunnels from Egypt, and the presence of so many Hamas and other Muslims in the U.S. to receive the re-settlers.
I am not surprised by one called naïve, inexperienced, in a job “above [his] pay grade," and since I read his autobiographical books, followed his “campaign rhetoric” as he called it and know his descriptions of his close associates, co-workers and “exotic background,” p. 120 + “I will stand with the Muslims," p. 261 of the Audacity book.
Too many windows open RonMar?
This comment obviously belongs elsewhere, because it certainly doesn't apply to this article.
Geither is has always been protective not of commercial banks but of investment banks like goldman sachs- doesn't anybody get it??????????????????????????
We get it. Now, the question is: What are we going to DO about it?
I will complain about Geither, Larry Sommers and other leftover Clinton administration employees to my US members of Congress. You should too.
This article is correct except for one statement. Common and preferred shareholders are not the bad guys here. Nor are the bondholders.
Millions of pension funds, individuals, mutual fund investors, etc. are taking a beating for investing their savings in the likes of Wachovia Bank AIG, Berkshire Hathaway A & B, Ford, General Motors, and thousands of other stocks.
Of course, if you used your savings to amass a lot of debt ( called leveraging) to buy stuff you could not afford to buy...why would you care about all the people who are losing money because you spent more than you could afford to spend.
Finally, we are still in Iraq. The latest news, folks, is we will withdraw troops for 18 months...BUT AFTER DECEMBER 2010 THER WILL STILL BE 30,000 to 50,000 TROOPS IN IRAQ. I can't believe this is happening.
WAKE UP AMERICA!!! Complain. Tell Congress to bring our troops home NOW.
Memo to Professor Black: The FDIC is already taking action against banks that are what economist Paul Krugman calls "zombie"banks.
Which banks? Not the zombie too-big-to-fail banks.
Well they first have to see that they are insolvent.
Excellent Point!
Guess what Wall Street invented another SCAM, "TOO BIG TO FAIL!"
Like all their other Scams this one insures the Biggest and Most ELITE Banksters can keep their JOBS and continue their Culture of Greed and Corruption that gives our Christmas Bonuses (they will rename them) of $30 to $100 Million for devising illegal and Toxic Schemes!
Geithner is to Obama as McClellan was to Lincoln. Steeped in orthodoxy, overwhelmed by the magnitude of the crisis, and making half-hearted attempts which, while not failing completely, shall not bring success, but only stalemate.
Obama seems determined to emulate Lincoln in every particular, good or bad. Both men understood the magnitude of the task facing them, yet also knew they themselves were not specifically educated in the subject (war for Lincoln, economics for Obama). To compensate, they turned to men well-known and established in their respective fields. Unfortunately, these men had achieved their credentials by being well versed in conventional thought, and adverse to violating it.
There is certainly risk in precipitous action, yet avoiding confrontation will only delay resolution as damage accumulates. It may yet be possible to finesse the situation before brute force and burnt earth are our only option, but convention and consensus cannot change the problematic paradigms.
Unlike Lincoln who fought off the corrupt bankers and issued "greenbacks" - as per Article 1, Section 8 of the US Constitution, Obama is in bed with them.
http://www.michaeljournal.org/lincolnkennedy.htm
Obama, is known as 'the wolf in sheep's clothing'. Lincoln was known as "Honest Abe"
- for many good reasons....
Excellent post.
Mr. Geithner appears to be another insider that cant think out of the box...
Doesnt he know that the old paradigm of politics and finances are dead?
It is clear, monopolies are the death of a free democracy…
Competition to build efficient banks, and green energy should be rewarded
with financial assistance. The Old World plutocratic financial and energy culture can either meet the challenge or not.
There are new Henry Fords, Alexander Graham Bells and Thomas Edisons waiting in the wings.
These are the new heroes the new thinkers that can and will push America out of the old model.
Mr. Geithner may not be one of these...
Please god help science save us from this mess!
Yes, there are new scientific frontiers to discover....but first...350 bill AUDIT! :)
Mr Geithner knows what to do- he just lacks the courage to do it. He needs public pressure on those who make the decisions.
Science, has given us global warming to support exporting our economy. Do not believe science will be a solution. It will not be. IT has never ever been. No one has any patent protection. NO banker will pay to develop anything here, when it can be done over there. Few scientists are competent enough to do anything of any real consequence.
the solution is money and government protection for people who live here.
sure hope you are right about Geitner
at first I felt good about it...but he seems scared or something...I guess I would be too. How do these guys not just get covered with nerve bumps or puke from the stress!
Mr Black says: " private shareholders should be eliminated " The market seems to be doing that now. Citi is down 90% in the last year as is Bank America. Others are worse, like Fifth Third, once a darling of the Street.
He also misses that names like Bear Stearns are gone (it wasn't "rescued" nor were its employees) others were absorbed at the behest of the Fed. BofA "bought" Merrill Lynch, is it possible that this was engineered by the Fed? How much of Bof A's problems come from ML?
Sorry but some of this smacks of a "why back in my day........"
Of course it was engineered by the Fed, - and Geithner helped them do it
Geithner, while President of the Federal Reserve Bank of NY, presided over the Wall Street collapse, was one of the chief architects of the Bear Stears and Lehman debacles, and was also involved with the Fanny Mae Freddie Mack scandals.. Geithner serves the greedy interests of the Rothchild banksters - owners of the Fed and World Banks - who created this financial crisis – and are the ones who are gaining the lion’s share of taxpayer bail outs.
Geither is also a shill for pro-Israel, pro-AIPAC– Zionist sympathizers, who want American taxpayers to continue funding Israel’s Zionist policies.
http://atlanta.craigslist.org/pol/1035650763.html
http://www.peacenowar.net/newpeace/index.php?option=com_content&task=view&id=443&Itemid=1
Geithner serves the shareholders of the privately owned Fed – not American taxpayers
http://www.youtube.com/watch?v=8VHNXTBwj80
It is also worth noting that immediately after Geithner attended the covert Bilderberger Meeting in 2008, which was led, as always, by representatives of the Zionist Rothchild banking dynasty - he pushed for a new US agenda in central banking, a nationalized system, which would consolidate and increase their wealth and power exponentially, and allow them to have total control of the US economy, Monetary policies, and all businesses in America,. ..
http://www.roguegovernment.com/news.php?id=9770
http://wnd.com/index.php?fa=PAGE.view&pageId=87497
Let's see - over the years FDIC has stepped in taking over banks temporarily and after the balancing act returned the banks to their rightful owners. At that time, we didn't call it nationalization so why now?
Yeah! Nationalization and Socialization are just words. It's what they accomplish that counts. Do the banks stay solvent? Are their records clean? How much are the golden parachutes and bonuses? If this is what Nationaliztion is SIGN US UP!
Same with "Socialized" medicine. I don't care whatcha call it, but is it efficient and cost contained? Are the insurance companies now out of the loop? YES? Then SIGN US UP!
Let's stop getting hung up on words our grand dads used to be afraid of.
This is not your grandpa's world anymore!
When one understands that Geithner went to the IMF asking for money to pay his taxes, and in lieu of paying taxes pocketed the money however once tapped for Scy Treasure he acknowledged he made a mistake and failed to pay taxes. Knowing he would have to come clean he finally paid his taxes. Now, what would expect of this individual??
True, and worse, it severely compromises his authority as head of the IRS to compel others to pay taxes. Especially since no one who knows anything about taxes really thinks it was a "mistake" (except in the moral sense).
I looked online for Title 12 Sec. 18310 and could not find it. I found Title 12 CFR Section 18, but could not find a current paragraph 310 in that section. Is the section to which you referred still current. CFRs change at a sometimes alarming rate. Maybe some scoundrel was able to do away this this section so it became "legal" to hide these events from the public.
If anyone can point to the current Title 12 CFR Sec. 18310 online, I'd like to read it.
just google section 38 of the FDI Act, 12 U.S.C. 1831o
When did we stop enforcing the law? Why are so many getting away with so much? What can we do to stop it? We need this high on Obama's radar, along with breaking up Murdoch's News Corp.
When did we START enforcing the law? Alexander Hamilton and George Washington established the National Banking System. Maybe, not enforcing the law started then. Wire tapes? Federal Reserve System, Rendition, Nixon Pardon, Iran Contra, Congressional Districts, Executive Orders, Executive Privilege, ---- all this stuff is unconstitutional. But, it goes on today. The article says Geithner is breaking the law. He works for Obama. So, his breaking the law is on Obama's RADAR. Obama is an accomplice. Business as usual.... No Change...
You are correct, when DID we start enforcing the law. Well, I for one am tired of Karl Rove just ignoring congressional subpoenas. The things you list all happened during Republican administrations. I think it will take longer than 30 days to see the change. And we all have to expect Obama to fire one or two along the way. Hang in there!
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