Banking Law

The Never-Ending Rewrite

I realize that the tin foil hat wearing Dennis Kucinich had yet to open his mouth to let the moonbats fly out when Texas-based Frost Bank announced last week that it would not participate in the federal government's handout of "real cheap" capital. However, the fact that he and other federal legislators have been spittle spewing their advice to the US Treasury Department about how those lenders who do sell preferred stock to the feds need to use that capital must make Frost Bank just as pleased as punch with its decision.

U.S. lawmakers are considering steps to alter the terms of the Treasury Department's financial-rescue plan, including forcing banks to lend funds they've received from the government and imposing new limits on executive compensation at firms that are part of the program.

In a growing number of letters, phone calls and public comments to Treasury Secretary Henry Paulson and his top officials, lawmakers are pushing Treasury to add strings to the $700 billion rescue plan. They complain that banks are using the billions invested by Treasury to fund acquisitions, repair their balance sheets and pay dividends, instead of increasing lending, the point of the program.

With Congress expected to return to Washington in a little over two weeks for a lame-duck session, critics hope their concerns can be translated into action. "We have to force these issues out into the open," said rescue-plan critic Rep. Dennis Kucinich (D., Ohio) in an interview.

Treasury in recent days has put pressure on banks to fulfill the program's goals, even as it has argued that banks will start lending again because that's how they make money. Officials have balked at adding criteria, worried that such a move would reduce participation in the program. Currently, there are few stipulations on how banks use the funds.

[...]

Senate Banking Committee Chairman Christopher Dodd (D., Conn.) offered a number of specific steps he is considering, including crafting a federal statute based on a New York state law that would allow the government to reclaim money from firms that accept federal funds but don't fulfill their commitments.

Current law would only allow the government, as a creditor, to take such a step if a company enters bankruptcy. Mr. Dodd said he wants to expand the government's right to address his concerns that companies may be using government funds to pay executives.

"We've got to make sure we deal with this," Mr. Dodd said, adding that he's tried lecturing firms "and it's not working."

Sen. Bernie Sanders (I., Vt.), another critic, plans to introduce legislation as soon as Congress returns in November that would put caps on executive compensation at firms that accept federal funds. In an interview, he expressed frustration that the rescue legislation was originally supposed to be used to buy up illiquid assets, but has since morphed into a vehicle for direct capital injections that healthy banks may be using to acquire weaker rivals.

Now, you have to love the idea of a law that will be enacted after preferred stock is issued, which will, basically, rewrite the terms of the preferred stock. That's a classic example of the breach-by-legislation that Congress used prominently in 1989 when it enacted FIRREA, which was discussed last week. If your purpose is to make banks think not only twice, but three or more times, before they step up to the plate and take their oh-so-tempting cut at a capital infusion, well, that's the way to do it.

On the other hand, many people, of all political stripes, not merely the usual suspects on the left-wing of the Democratic party, are starting to wonder how inept are the clowns in this Administration. I mean, it's the Bush Administration, so I suppose there is no bottom to the market of both bad ideas and poor execution, but still...

Every knowledgeable observer understands that the bailout legislation gives the Treasury immense discretion and flexibility to bollocks things up. They can, on a case-by-case basis, provide capital to a bank such as...oh...for example...PNC, which uses it to purchase another bank such as...oh...for example...National City. That's been a very noncontroversial use of bailout bucks, hasn't it? Of course, it has produced the always amusing occurrence of watching a U.S. Congressman and the Comptroller of the Currency calling one another egg-sucking dogs and nattering nabobs of negativism. Plus, Comptroller Dugan called Rep. Steven LaTourette a bald-faced liar. Or, perhaps, he merely called him a blithering idiot. We report, you decide.

Aside from the comic relief, however, the second-guessing reveals another aspect of how potentially dangerous it is when you begin (as Edward Sisson put it) "dancing with a bear." It's not merely that you "don't stop dancing until the bear gets tired" (as real a danger as that may be). It's also that every jackal and hyena in the jungle gets to tell the bear where and when it should slam you into a tree, throw you to the ground and sit on your head, maul your nether regions, or gnaw off your left arm. Or worse: drag you into its cave for some "spooning."

If you want to get into this dance, you sure as heck shouldn't be a Cloris Leachman of the banking world.

If you're financially healthy and don't absolutely need the capital, you should also have your head examined.

Full post as published by Bank Lawyers Blog on November 02, 2008 (boomark / email).