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William Black Responds

By Big Tent Democrat

Defenders of Tim Geithner criticized William Black for arguing that the Prompt Corrective Action Law mandated regulatory receivership for insolvent banks. I noted and discussed the criticism here. Now the subject of the criticism, Black himself, has responded along the lines I brought forth:

The commentator’s primary concern can be answered briefly because it criticizes a claim I never made. S(he) notes that banking holding companies and insurance companies are not subject to PCA. I did not say that they were. As the interview excerpt shows, we were talking about “[savings] institutions” and “banks” that can be put into “receivership” (I’m going to use “bank” here to refer to any FDIC-insured depository institution.) The FDIC (and if it lacks the funds, the U.S. Treasury) is only legally obligated to pay depositors of FDIC-insured banks up to the deposit insurance limits. The federal banking regulators have receivership powers only over federally insured depository institutions. The FDIC and the U.S. Treasury have no obligation to pay the debts of bank holding companies or insurance companies – and shouldn’t be paying those debts.

The commentator uses this strawman argument (refuting a claim no one made) to imply that the fact that PCA doesn’t apply to bank holding companies means that the federal financial regulators did not have to comply with the PCA law. S(he) lists a series of companies, primarily large bank holding companies (BHCs) and declares that their existence means: “So, pretty much all of the really big players don't fall under the PCA in the first place.” Bank holding companies, of course, are called that because they own banks – and the U.S. banks they own are subject to PCA. The fact that a bank is owned by a holding company is irrelevant to the PCA’s requirements; it provides no immunity from the PCA. BHCs are “really big players” because they own massive banks subject to the PCA. The banks are the “really big players” and they are subject to the PCA law. When we put insolvent banks into receivership their BHCs and affiliates lose all control of the bank. The FDIC has sole control of it.

PCA does not apply to the corporate owners of banks or their non-bank affiliates. However, the bank subsidiaries are the dominant assets of almost all holding companies that own banks. As such, the failure of the banking within the group is likely to trigger the failure of the holding company.

To sum up the first point: banks are the issue. U.S. banks have FDIC insurance and are subject to the PCA law, regardless of whether they are owned by a BHC. Deposit insurance covers only insured banks, not BHCs, so the FDIC, the Treasury and the taxpayers do not owe any obligation to pay their creditors. If the commentator is worried that BHCs will escape receivership, s(he) need not fear. BHCs and insurance companies such as AIG are subject to the bankruptcy laws, which can be used to block and even “claw back” excessive and fraudulent executive compensation. (Treasury is also requesting Congress to grant it authority to place BHCs and some insurers into receivership.)

The PCA law mandates receivership in these circumstances.

(Emphasis supplied.) So we come back to the real issue, which is the policy issue - what to do. I have seen no good arguments for saving the "non-banks". When they come forward, then we can address them.

Speaking for me only

Full post as published by TalkLeft on April 06, 2009 (boomark / email).