[Peace-discuss] FW: Why Is Geithner Continuing Paulson's Policy of Violating the Law?

[LAURIE SOLOMON]

what do you expect when you appoint the head of New York Fed to "fix" the
banking problem?

Why Is Geithner Continuing Paulson's Policy of Violating the Law?

Posted February 23, 2009 
William K. BlackAssociate Professor, University of Missouri;
 Senior regulator during S&L debacle

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_16
9234.html





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