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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The corporatio
Obama has continued some Bush policies - military actions in Iraq, Afghanista
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 Ahmadineja
I am not surprised by one called naïve, inexperien
This comment obviously belongs elsewhere, because it certainly doesn't apply to this article.
This article is correct except for one statement. Common and preferred shareholde
Millions of pension funds, individual
Of course, if you used your savings to amass a lot of debt ( called leveraging
Finally, we are still in Iraq. The latest news, folks, is we will withdraw troops for 18 months...B
WAKE UP AMERICA!!! Complain. Tell Congress to bring our troops home NOW.
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!
Obama seems determined to emulate Lincoln in every particular
There is certainly risk in precipitou
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Obama, is known as 'the wolf in sheep's clothing'. Lincoln was known as "Honest Abe"
- for many good reasons...
Doesnt he know that the old paradigm of politics and finances are dead?
It is clear, monopolies are the death of a free democracy…
Competitio
with financial assistance
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!
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
the solution is money and government protection for people who live here.
at first I felt good about it...but he seems scared or something.
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.......
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
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Geithner serves the shareholde
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It is also worth noting that immediatel
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Same with "Socialize
Let's stop getting hung up on words our grand dads used to be afraid of.
This is not your grandpa's world anymore!
If anyone can point to the current Title 12 CFR Sec. 18310 online, I'd like to read it.