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Denninger Picks Up Where Black Left Off: FDIC MUST Follow the Law

04 Sep

Karl Denninger and Bill Black have been talking about the Prompt Corrective Action law for some time; it appares at least for now, one jude is listening…

In a word, “good

Judge Dwight H. Williams Jr. of the U.S. Bankruptcy Court in Montgomery, Ala., on Tuesday granted summary judgment to Colonial BancGroup Inc., the failed thrift’s corporate parent, in a ruling dismissing the FDIC’s attempt to go after the parent for failure to maintain capital levels at the bank.

As well he should.

Here’s why.

The FDIC had every opportunity to close Colonial using the precepts of “Prompt Corrective Action”, as I have repeatedly documented.  Indeed, the fact that the FDIC keeps closing banks and in doing so reports asset and liability levels that show the bank is not insolvent on the face of the numbers, but then takes 20, 30, even 40% losses on those “assets’, is proof positive that it is accepting in it’s call reports and other documentation false asset valuations.

Prompt Corrective Action, otherwise known as 12 USC Chapter 16 Section 1831o, does not contain “mays” – it contains a litany of “SHALLs.”

I have written about this misfeasance and willfully-blind abuse for more than two years.  It was apparent at the beginning of this mess that the FDIC was intentionally ignoring the precepts of that law, in that it requires assessment of capital adequacy and corrective action, and nowhere does it grant permission to lie about the actual value of assets.

There is in fact no wiggle room here.  Since PCA deals with the actions necessary in the event of a seizure, and is intended to protect the FDIC from loss, it therefore follows that any fantasy “mark-to-model” nonsense cannot be accepted by the FDIC, since for purposes of the act one must presume that the bank is being liquidated, and thus only market prices matter.

In Colonial’s case, the FDIC argued that the bank’s former parent owed it $909 million, an amount equal to the gap between how much capital its banking subsidiary was required to have and what it actually had on hand when it was seized by regulators in August 2009. The FDIC said Colonial’s holding company in recent years made numerous commitments to regulators to shore up the bank’s capital.

And there it is folks.  The holding company made numerous commitments to the FDIC did not actually meet them, and the FDIC failed to act to mitigate its own risk. Clearly, the FDIC had the ability to know - it just decided not to care.  Sheila Bair must be held personally to account for this, as must the rest of the FDIC and regulatory organizations – in this case the OCC, in others (e.g. WaMu) OTS.

In the common civil arena you can’t willfully ignore that you’re being harmed and then later come and try to recover in court; you are generally barred from recovery from the point beyond which you both become aware of the problem and have the ability to mitigate that harm but intentionally refuse to do so.

In this case, however, the problem goes well beyond this, in that PCA is supposed to prevent any loss at all, in that it mandates steps be taken while the bank is still well within a positive-equity position – that is, not (yet) bankrupt.  This should provide plenty of time for the FDIC to come in and seize the institution if these steps prove ineffective (or are simply not taken) before an actual loss occurs.  The requirements placed on the FDIC, OTS and OCC are prospective in nature – that is, they provide that these organizations are required to both investigate and act, and cannot simply rely on “claimed” valuations or other metrics provided by those who may or may not be truthful.

That legally-mandated bank supervision of asset valuation and resulting capital adequacy not only has not but continually does not (to this day) happen must, at some point, be recognized as an intentional dereliction of duty - a duty set forth in statute.

It appears that while the judge in this case did not use this premise to arrive at the result, he nonetheless did arrive at the correct decision – you cannot willfully ignore the law, and then when harmed by your willful head-in-sand attitude and approach, appeal to the law for redress.

 

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  1. S. Quade

    December 17, 2011 at 8:52 am

    Right.
    Who’s going to make them?