Posted by Karl Denninger
The good news is that the FDIC has a well-established process that works for failing banks. Going forward, this model should be available to close large, failing firms. This means banning government assistance to individual companies and forcing them into orderly liquidation.
The FDIC has a law called “Prompt Corrective Action” (USC 12 Chap 16 Section 1831o) which the FDIC and other regulators have absolutely ignored for the last three years.
This law applies to all insured depository institutions, including the “too big to fails” such as Wells, Citibank and JP Morgan. It was put in place after the S&L crisis specifically to prevent the abuses that were rampant during those years, including evasion of capital requirements, lies about asset valuations and other forms of control fraud that led to bank executives stealing billions from taxpayers and prudent institutions during the S&L crisis.
This law begins with:
Each appropriate Federal banking agency and the Corporation [that’s the FDIC – ed] (acting in the Corporation’s capacity as the insurer of depository institutions under this chapter) shall carry out the purpose of this section by taking prompt corrective action to resolve the problems of insured depository institutions.
Note that it doesn’t say “may”, it doesn’t say “except for institutions we think are too big to fail”, it doesn’t say “except for politically connected firms that are performing obscene acts on myself and other banking regulators, whether they be acts of bribery with money, votes or sexual favors.”
It says shall and it provides no leeway or discretion.
This law, if followed, absolutely prevents the FDIC from taking deposit fund losses. It also prevents “too big to fails” from being too big to fail, since they are subject to the same sanctions and closure as is the small local bank on the corner.
It was and is the willful refusal of Sheila, along with Dugan at OCC, to follow this law as written that has enabled the “too big to fails” to continue to operate. Had that law been followed EACH AND EVERY ONE OF THESE INSTITUTIONS THAT TAKE DEPOSITS WOULD TODAY BE CLOSED AND DISSOLVED as the law provides for NO DISCRETION in the actions of these regulators.
We cannot afford to let the status quo continue. We must embrace sensible regulatory changes and send a strong signal to large institutions and those who invest in them that from now on, they must sink or swim on their own. Only then will theoretical market discipline become reality.
Ms. Bair is chairman of the FDIC.
The law does not matter if those charged with enforcing it simply refuse, as Ms. Bair along with The Fed, OCC and OTS have demonstrated.
There was at the inception of this mess (and there remains today) not only sufficient legal authority to resolve these firms there is in fact a legal MANDATE that such firms be resolved rather than bailed out.
Sheila Bair is and has been a lying sack of crap. She is asking for that which she won’t use, just as she has wilfully and intentionally allowed the taxpayer and the prudent banks of this nation to be repeatedly looted through her willful and intentional refusal to enforce already-existing black-letter law.
That The Wall Street Journal continues to publish her bleating and lies simply means that they, along with the rest of the media, are complicit in these acts and in fact are accessories before and after the fact in the act itself and its willful whitewashing.
We no longer live in a representative republic or a nation of laws and our Felonious Government has become filled with serial offenders.
In the area of banking regulation Sheila Bair is the poster child for that willful and intentional refusal to follow black-letter law as written.