Wednesday, March 25, 2009

Another Call for a Pecora Commission

The following call for a new version of the Pecora Commission escaped by notice till now. William Black was a senior regulator during the S&L debacle and is now an associate professor at the U. of Missouri.  In "Why is Geithner Continuing Paulson's Policy of Violating the Law?" (Feb. 23, 2009) he wrote:

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.


This blog called months ago for a modern version of the Pecora Commission.  Senator Shelby of Alabama has joined that call recently.  

Britain ruled the world's financial system throughout the 19th century.  It had no banking crises.

The U. S. has had two major banking crises in the past twenty-or-so years.  Why?


The fixes proposed are alleged by Mr. Black to be illegal and also designed to allow criminals to avoid prosecution:

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.)

Under the current Obama-Geithner plan, all the burden falls on taxpayers, except for the minor exception that dividends on common stock have been cut.  An obvious and major subsidy is inherent in the bailout proposal, as it guarantees above-market pricing for the bad securities the financial institutions hold.  Further, there are massive conflicts of interest here.  Blackrock, in which Bank of America has a substantial stake, is going to be a major bidder (read purchaser) of these securities.  How on earth can Blackrock be allowed to take part in this?

If you would like to see more current commentary on the Obama-Geithner bailout plan, Mish has had a recent series of posts that are harshly critical, most recently wondering how on top of all the mess he has made as head of the New York Fed for years and now as Treasury Secretary, Mr. Geithner can request sweeping powers to bail out or close down whatever companies he wants with minimal checks and balances ("Geithner's Arrogance Knows No Bounds").

Finally, now that the headlines have moved away from AIG, the compensation diversion is petering out in the Senate.  This has been a largely successful tactic so that there was no focus on the real scandal, the tens of billions of dollars that went to AIG's gambling buddies (many of them foreign) to make them whole dollar for dollar.

The Fed today is beginning open-market purchases of Treasuries.  Also in the news is that the sale of 40-year bonds by the Government of the United Kingdom failed to attract bids for as much as was on sale, thus representing a failed auction for the first time in 14 years.

In the U. S., production of automobiles and homes is at levels last seen decades ago.  Even if they rebound, so what?  As with so many other matters, this is just not supposed to happen. Period.

This is such an extreme environment that in deciding what to do with investments, business tactics and strategy, and the like, reasoning from historical analogy makes less sense than usual.


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