Legal Commentary

Bank Holding Companies Are Not a Legal Impediment To Regulatory Receivership

By Big Tent Democrat

One of the strange inaccurate defenses that you read about President Obama's reluctance to use the power of regulatory receivership regarding the financial crisis is that since banks are held by bank holding companies, the banks themselves can not be taken over without new legislative authority. Here is an example:

First, the Prompt Corrective Action ("PCA") law does not give the FDIC the ability to take over any Bank Holding Company ("BHC"). Instead, BHC's are regulated and governed by the Federal Reserve, pursuant to The Bank Holding Act of 1956. Amongst the financial institutions that are thus not subject to the PCA are JP Morgan Chase, Citigroup, Bank of America, Wells Fargo HSBC, Goldman Sachs, Morgan Stanley. . . . [B]y the way, the FDIC has been seizing commercial banks, including Washington Mutual when it has determined it to be necessary. But, for obvious reasons the FDIC has decided that trying to gobble up the entire banking system is neither legal nor wise.

(Emphasis supplied.) This is sophistry. We can debate the wisdom of regulatory receiverships for insolvent banks, but you can not question that the power currently exists. To argue so is to simply ignore the facts. Here's a clue, every bank holding company has a bank that it holds. There is no need to seize the bank holding company, just the bank. Indeed, the WaMu example cited by that diarist, Geekesque, is instructive. In fact, the WaMu bank holding company has sued the government, but not for the seizure itself, but for not garnering sufficient value from the sale of the WaMu bank assets:

Washington Mutual's holding company is suing federal regulators for billions of dollars, saying the firesale of the bank's assets to JPMorgan Chase violated its rights. The lawsuit was filed Friday [March 21] in federal court against the Federal Deposit Insurance Corp., which seized the Seattle-based savings and loan in September. It was the largest bank failure in U.S. history.

Lawyers for the holding company, Washington Mutual Inc., argue that the bank was worth more than the $1.9 billion JPMorgan paid for it in a deal arranged by the FDIC. The lawsuit argues that if WaMu's assets had been liquidated prudently, they would have been worth more than that.

The WaMu bank holding company is not arguing that its bank could not be seized. It is arguing that the government did not maximize the value of the bank assets seized.

When discussing the financial crisis and the Obama Administration's policies addressing the crisis, it is important to try and stick to the facts - whether you favor or oppose the Obama Administration policies.

Speaking for me only

Full post as published by TalkLeft on April 04, 2009 (boomark / email).