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See end of diary for clarification of why Bank Holding Company status matters

Really--that's a pretty low bar.

When we read extraordinary claims that President Obama is flagrantly violating the law, as claimed by an  egregious disgrace of a diary on the top of the Recommended List, we need to engage in critical thinking instead of letting our emotions take us for a fool's ride.

To be blunt:  that diary  would be a disgrace if it were posted at Redstate or Free Republic.  

Its place here speaks poorly of not only the author, but those who got taken in despite the fact that they should know better.

At least the loons at Red State don't publish obviously false stupidity in order to tear their own people down.  And we should hold ourselves to a much higher standard than that.  Bush is no longer President.

The sadly necessary demonstration of what is true and what is false below the fold.

The diary, channeling the frustrated rantings of has-been regulator William K. Black, accuses the Obama administration of illegal conduct.

Black, who supported the presidential campaign of Barack Obama, excoriated both President Obama, and former President Bush, and their Treasury Secretaries Timothy Geithner and Hank Paulson, respectively, for deliberately and consciously violating the law. Specifically, the Prompt Corrective Action Law, passed after the savings and loan crisis, which mandates that severely undercapitalized banks be promptly put into receivership  (i.e., nationalized).

(emphasis in original, believe it or not)

This is a lie.  Not a reasonable difference of opinion.  A lie.  A material misstatement.

Now, it is true that the diarist got this lie from Black himself, and may have been merely negligent in passing it on:

WILLIAM K. BLACK: Well, certainly in the financial sphere, I am. I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they're refusing to obey the law.

BILL MOYERS: In other words, they could have closed these banks without nationalizing them?

WILLIAM K. BLACK: Well, you do a receivership. No one -- Ronald Reagan did receiverships. Nobody called it nationalization.

BILL MOYERS: And that's a law?

WILLIAM K. BLACK: That's the law.

BILL MOYERS: So, Paulson could have done this? Geithner could do this?

WILLIAM K. BLACK: Not could. Was mandated—

BILL MOYERS: By the law.

WILLIAM K. BLACK: By the law.

Again, let me repeat.  This is a lie.  

And quite a lie it is.  It is a lie on at least two levels.

First, the Prompt Corrective Action ("PCA") law does not give the FDIC (or OCC or Federal Reserve) the ability to take over any Bank Holding Company ("BHC").  BHC's are regulated and governed by the Federal Reserve, pursuant to The Bank Holding Act of 1956. The PCA applies to insured depository institutions, i.e. the retail bank operation as opposed to the investment bank and bond trading desk.

Amongst the financial institutions that are thus not subject to the PCA are:

JP Morgan Chase
Bank of America
Wells Fargo
Goldman Sachs
Morgan Stanley

And, of course, the PCA also does not apply to AIG, which is an insurance company and not involved in banking at all.  So, pretty much all of the really big players don't fall under the PCA in the first place.  Their commercial banking subsidiaries very well may, but your local Bank of America branch is not at the root of this crisis.  We can seize the banking units that aren't the problem, but we can't seize the banking units that are the problem.  (See the UPDATE regarding the horror show that could result from plucking a retail bank out of a conglomerate like Citi).  And we won't even get into the whole problem of international banks like Citi, CSFB, or UBS.

Second, the diary is a blatantly inaccurate because it states an impossibility.  What?  It claims that Obama is breaking the law by not nationalizing a bunch of banks, when the language of the statute explicitly gives the government considerable discretion in deciding whether to do . The PCA does not mandate that the FDIC take over any bank .

Incredibly, the diary in question actually links to and quotes the Prompt Corrective Action Act.

TITLE 12 > CHAPTER 16 > § 1831o

§ 1831o. Prompt corrective action

(d) Provisions applicable to all institutions
(2) Management fees restricted
An insured depository institution shall pay no management fee to any person having control of that institution if, after making the payment, the institution would be undercapitalized.


(3) Conservatorship, receivership, or other action required
(A) In general
The appropriate Federal banking agency shall, not later than 90 days after an insured depository institution becomes critically undercapitalized—

(i) appoint a receiver (or, with the concurrence of the Corporation, a conservator) for the institution;


(ii) take such other action as the agency determines, with the concurrence of the Corporation, would better achieve the purpose of this section, after documenting why the action would better achieve that purpose.

We generally teach children what the word "or" means during grade school.  If you are told that you need to go left or right, that does not mean that you are mandated to go left.   It is dishonest to pretend otherwise.

And, let us not even get into the fact that there is no indication that the banking units that could be seized--the retail chartered banks--are poorly capitalized.  Rather, all indications are that it is the BHC's that got stuck with the toxic assets that are struggling on that end.

And, by 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.

In short, the claim that the Obama administration is breaking the law is a BALD FACED LIE.

It is not being an Obamabot or cultist to point this out.  It is being intelligent, rational, and objective.  It is the fools who automatically believed that Obama is a criminal because of a Daily Kos diary that are behaving irrationally.

UPDATE:  Big Tent Democrat misapprehends, or perhaps I have failed to explain, a crucial point.

Let's step back and take Bank of America as an example.  A great deal of its toxic garbage is concentrated not in its retail and consumer banking divisions, but in its investment banking and securities trading divisions, especially after the acquisition of Merrill Lynch.  In other words, its chartered depository bank is doing just fine and is no danger of missing capitalization requirements.  However, its other divisions are struggling under the weight of the toxic assets and could fail.  But, no one can touch those.

Or, let's take Citi as an example.  Per Time's excellent Justin Fox.

The first striking thing there that Citi's U.S. banking operation just isn't all that big: J.P. Morgan Chase has $722 billion in U.S. deposits (and $287 billion outside the country). Washington Mutual, which was not deemed by regulators to be too big too fail, had $182 billion in deposits, in the same territory as Citi's U.S. bank.

The second is that if Citibank's overall business breaks down along domestic/foreign lines pretty much as deposits do (which probably isn't quite the case, but close enough), that gets you to $392 billion in assets and $365 billion in liabilities. That's the part of Citigroup that the FDIC has the authority to take over. I bet the FDIC could handle it, at least if it gets the new $500 billion credit line it wants from Congress. But this would leave an entity (or entities) with about $1.5 trillion in assets and $1.4 trillion in liabilities to be taken over by foreign governments or fail in pretty much the same unruly manner that Lehman Brothers did.

To repeat: Citigroup has liabilities of $1.797 trillion. The deposits that the FDIC has some responsibility for (up to $250,000 per depositor) add up to $241 billion. So we have this reasonably sensible system for winding down troubled banks, but when it comes to the most troubled big banking company in the country, said system only covers a fraction of the overall operation. Which leads to a couple of conclusions:

  1. I get why the administration is so reluctant to take over Citi completely.
  1. I don't get why we all (I'm including myself in this) thought it was okay to allow the creation and growth of gigantic financial companies for which we had absolutely no plan for winding down in case of trouble.

Originally posted to Geekesque on Sat Apr 04, 2009 at 08:23 AM PDT.

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