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William Black Responds

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

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    There are no good arguments for saving (5.00 / 7) (#1)
    by Militarytracy on Mon Apr 06, 2009 at 08:49:00 AM EST
    the "non-banks", they are not insured and it is their fault that they are in the mess they are in.  They are failed businesses, they must save themselves just as you and I will eventually have to by rearranging parts of our lives based on the new financial reality we are entering.  William Black has really grown on me.  When he speaks you can hear it in his voice that he knows better than anyone who whines about how hard this is going to be exactly how hard it is going to be.  He was part of healing the S&L scandal and as hard/scary as it was the fearless went in there and did what had to be done.  He knows that the only way we can get back to an economy that can serve any of us and is not sputtering, anemic, and often keeling over is through cutting off all this fraudulent solvency as quickly as possible.  It should have begun yesterday!  But what do I know?  I'm on the dole of the LAST PENSION that will ever disappear on the globe and I'm in for a nice fat monthly fixed sum that won't leave a nostalgic eye dry if they have to reduce one penny of it since you guys sent us all to Iraq where we got our arms, legs, and brains blown out.  So please, don't fix any of this whiners....lose your jobs.....come clean my toilets cheap.  I can't wait to get ahead on the backs of all of you.

    remember the bonus marchers. (5.00 / 1) (#4)
    by Salo on Mon Apr 06, 2009 at 09:04:16 AM EST
    Don't count on that pension.  Your's may be the first to go if you look back tot he 20s and the 30s.

    Parent
    I seriously seriously seriously doubt that (5.00 / 2) (#15)
    by Militarytracy on Mon Apr 06, 2009 at 10:15:52 AM EST
    Sounds more like a personal thing with you.....good luck getting it away from me.  I don't have my head in the sand and I've planned accordingly.  My husband's getting ready to deploy again, back to more war and this time for the Democrats.....we are doing war and I so seriously doubt our pension will be touched until the very last....but hey, whatever.

    Parent
    There's no comparison (5.00 / 1) (#43)
    by cal1942 on Mon Apr 06, 2009 at 11:49:50 AM EST
    between a military pension and the bonus marchers.

    Military pensions are paid to career military.  The bonus marchers were seeking the EARLY payment of a promised one time reward for serving in WWI.

    Parent

    what's funny about this... (none / 0) (#77)
    by Salo on Mon Apr 06, 2009 at 01:42:51 PM EST
    ...is that teh soldier of ww1 did heck of a lot more than the any any other body of American troops (bar the GIs of ww2)

    So yeah there's no comparison.  They were citizen cannon fodder in the nastiest war in history.  Not professional soldiers at all.  Bless them.

    Parent

    I don't know about that (none / 0) (#105)
    by cal1942 on Tue Apr 07, 2009 at 04:25:10 PM EST
    I'd have hated to be a GI at Omaha beach or a Marine at Chosen Reservoir or a GI or Marine on Okinawa.  It would've hated being in Vietnam or Iraq with a target painted on my back or a Union soldier at Fredricksburg or a Confederate soldier at Gettysburg. Or in any of the many hundreds of other places of unspeakable horror.

    I can't really rank the hardship, danger, terror of various wars.

    Parent

    Oh fook. (5.00 / 2) (#2)
    by Salo on Mon Apr 06, 2009 at 08:55:05 AM EST
    Lefties defending banksters and sweetheart deals for banksters.  Thought the day would never come--didn't see the A-Team on the Orange Satan doing the defending either.

    well no...I take that back... (none / 0) (#3)
    by Salo on Mon Apr 06, 2009 at 09:00:21 AM EST
    ...I saw such a craven defense of the indefensible coming a year off.

    Parent
    Yeah (5.00 / 14) (#5)
    by Ga6thDem on Mon Apr 06, 2009 at 09:16:36 AM EST
    you had to see it. It was excuse after excuse and it keeps on coming. It seems that the D party is in as bad a shape as the GOP on this account. Not holding Bush accountable destroyed the GOP. Not holding Obama accountable will destroy the Dems AND make way for a facist to take over the country in '12. This is way bigger than Obama. He should quit whining about how he inheirited this mess. Yes, he did but if he didnt want to deal with it then he shouldn't have run for President.

    Parent
    Fascists are in power now.... (5.00 / 2) (#12)
    by kdog on Mon Apr 06, 2009 at 10:10:37 AM EST
    Paulson, now Geithner...Bush, now Obama....government by, of, and for monolith financial instituitions.

    We blinked and missed the coup.

    Parent

    Exactly (5.00 / 5) (#14)
    by TeresaInSnow2 on Mon Apr 06, 2009 at 10:14:24 AM EST
    People have to abandon that paradigm that only the Republicans can be bad, bad, corrupt, people.  Democrats can be just as bad.

    Parent
    If ya forget about gay marriage... (5.00 / 2) (#16)
    by kdog on Mon Apr 06, 2009 at 10:17:03 AM EST
    abortion, and a couple other wedge issues for a second, the two parties are impossible to tell apart...especially when it comes to the federal reserve bank and treasury policy.

    Parent
    And environment (5.00 / 2) (#19)
    by TeresaInSnow2 on Mon Apr 06, 2009 at 10:22:16 AM EST
    Another wedge issue.

    I keep asking myself, is it okay to put up with the corruption from the Democrats, if they're good on the environment?

    And my answer is the same as it's always been ... since both are corrupt, I want divided government.  The two parties' desire to destroy each other creates some form of accountability -- at least more than we have with Obama and his fawning Congress and press.

    Parent

    I tend to agree... (none / 0) (#22)
    by kdog on Mon Apr 06, 2009 at 10:29:04 AM EST
    if we can't get any kind of viable third-party "none of the above" option going, it is better that power be split down the middle between these two crooked outfits, less dangerous that way.  Let 'em each other as much as possible instead of feasting on us exclusively.

    Parent
    luckily they don't have a roguish charmer... (3.00 / 1) (#6)
    by Salo on Mon Apr 06, 2009 at 09:21:18 AM EST
    ...waiting in the wings.  Romney is too stiff, Jindal too weird. Palin, too stupid to use the English language or understand what conservatism is.

    Perhaps there's some genius governor from the south they have ready to go but I have not seen him yet.

    Parent

    You've (5.00 / 2) (#9)
    by Ga6thDem on Mon Apr 06, 2009 at 09:24:36 AM EST
    forgotten about Huckabee. They're also talking about Sanford but he's pretty much a joke.

    Parent
    Too bad Huckabee's son slit that dog's throat (5.00 / 2) (#42)
    by lambert on Mon Apr 06, 2009 at 11:45:13 AM EST
    Ooops, yes I did (none / 0) (#10)
    by ruffian on Mon Apr 06, 2009 at 09:53:54 AM EST
    forget about Huckabee. Good call.

    Like you I thought of, and discarded, Sanford.

    Parent

    Haly Barbour! (none / 0) (#13)
    by MrConservative on Mon Apr 06, 2009 at 10:14:01 AM EST
    excellent (5.00 / 2) (#25)
    by Capt Howdy on Mon Apr 06, 2009 at 10:39:28 AM EST
    someone just as venal as Bush but not as stupid.


    Parent
    Hey, and I can sense that Shelby (none / 0) (#26)
    by Militarytracy on Mon Apr 06, 2009 at 10:48:44 AM EST
    Who was the only Repub to not vote for that investment and banking modernization act, is hunting high and low for a Presidential contender to back and feed his new found fame and credibilty to.

    Parent
    Sarah Palin (5.00 / 2) (#18)
    by Militarytracy on Mon Apr 06, 2009 at 10:18:18 AM EST
    "Romney is too stiff . . . (5.00 / 1) (#24)
    by Capt Howdy on Mon Apr 06, 2009 at 10:38:12 AM EST
    . . . Jindal too weird. Palin, too stupid"

    two words, George Bush.

    Parent

    Exactly (5.00 / 1) (#30)
    by TeresaInSnow2 on Mon Apr 06, 2009 at 11:01:06 AM EST
    If people are pissed, they'll vote for the anti-incumbent.

    Parent
    We need people to get... (5.00 / 1) (#52)
    by kdog on Mon Apr 06, 2009 at 12:07:22 PM EST
    really, really pissed then...maybe a Nader, or a Kucinich, or a Paul will get some votes.

    Standard grade pissed isn't cutting it, we get a Team R crooked schlub followed by a Team D crooked schlub....rinse and repeat.

    Parent

    Romney (5.00 / 2) (#62)
    by jbindc on Mon Apr 06, 2009 at 12:36:31 PM EST
    McCain was a sacrificial lamb this year.  After the way the Bushies treated him in SC in 2000, this was payback from the party.  Romney is a great candidate - good looking, charming, beautiful family, savior of the 2002 SLC Olympics, businessman, etc.  The only thing that prevented him from getting the nomination was the whole Mormon thing, and now I think the evangelicals will get over that pretty quickly.

    Parent
    yeah keep it up (5.00 / 7) (#32)
    by TeresaInPa on Mon Apr 06, 2009 at 11:05:49 AM EST
    keep being a media victim and believing Palin is stupid... we will have our first female president and it won't be a democrat as long as you guys continue to be this foolish and sexist.

    Parent
    I tend to agree (5.00 / 1) (#33)
    by Capt Howdy on Mon Apr 06, 2009 at 11:11:21 AM EST
    all she needs is better packaging.  which she will probably get.  I think this one is a real threat.
    she has that "thing".

    Parent
    And some coaching (5.00 / 2) (#48)
    by BernieO on Mon Apr 06, 2009 at 12:02:52 PM EST
    on international issues, which she is probably getting already. I think there could be a backlash against the sexist treatment she got, too.

    I keep wondering if Jeb will be rehabbed. Right now that seems impossible, but stranger things have happened - like his brother getting elected to anything, let alone president.

    Parent

    Jeb could be laying low on purpose (none / 0) (#88)
    by Inspector Gadget on Mon Apr 06, 2009 at 03:03:12 PM EST
    and preparing for a rise, but, what part of the financial world will he be responsible for destroying? Daddy took down the S&Ls, W got the banks. What will Jeb be tasked with?

    Parent
    She can't articulate the basis of her own ... (none / 0) (#86)
    by Salo on Mon Apr 06, 2009 at 02:22:45 PM EST
    ...philosophy.   She's got some charm, but she's ultimately a bit too thick and inarticulate for the job.  I rated her quite highly at teh time of the election right after McCain unveiled her, but she failed monumentally in various ways.

    Parent
    Was sitting here thinking (4.75 / 4) (#34)
    by Militarytracy on Mon Apr 06, 2009 at 11:11:34 AM EST
    and you know what Salo?  After the Nixon administration.........how is it that Jimmy Carter got one term and was then beaten by Ronald Reagan and we got to have that clown for eight long years?  Don't think for one minute that because of what Bush and his party did, that that means that the Democrats can get away with incompetency or manipulating the people out of some sort of denial that they are touchable.  They're highly touchable right now because people are hurting.  The little people are really really going to be hurting under the Geithner plan and the people are going to vote for anyone who can make claims that they can make the hurting stop.  And it is doubtful they are going to trust the man brought them more hurt in the name of saving Wall Street.  Oh Man, and the Republicans.....they are all packing 50 cals in four years when things aren't better and in fact have gotten worse because they weren't for saving anybody at all.  They didn't care if everything burnt to the ground.  But in four years the only thing the people will focus on is that things might have been better for them if we had gone with that plan and the Republicans are going to beat that rule of moral hazard to death and have it reborn so many times over in the hearts of the hurting people........if the Democrats don't succeed I can almost promise you the reapings of the failure is going to make us all cry.  The Repubs don't have to do much right now other than watch us fail.

    Parent
    I do think Reagan was a foolisjh senile old man. (none / 0) (#78)
    by Salo on Mon Apr 06, 2009 at 01:45:30 PM EST
    but he had charm.

    Parent
    who do you think will take the heavy hit? (none / 0) (#87)
    by Salo on Mon Apr 06, 2009 at 02:29:08 PM EST
    Mainly Blacks.  They are already quite lower on the income scale and will probably suffer the most in the coming years.  They will not make a loud noise as long as they have Obama there because: he is a symbol of their own aspirations.  It's a very peculiar dynamic that cuts across ethnic and social strata.  I think Obama will be able to fend off the GOP candidate because he is spending so much time sucking up to the current power structure and ensuring its survival.  The working class ( or what is left of it) can be most effectively quieted, dismantled and marginalized under his watch.

    Parent
    Newt! (none / 0) (#7)
    by talesoftwokitties on Mon Apr 06, 2009 at 09:24:07 AM EST
     ;-)

    Parent
    dont laugh (none / 0) (#35)
    by Capt Howdy on Mon Apr 06, 2009 at 11:16:34 AM EST
    I think its possible and he could be formidable.

    Parent
    Not if Jon Stewart get ahold of clips (none / 0) (#53)
    by BernieO on Mon Apr 06, 2009 at 12:07:43 PM EST
    of all the crazy things he has said in the past.

    As for Newt, I heard him talking about converting to Catholicism and saying he and his wife did everything they needed to fully qualify, so to speak. I am puzzled because I was always taught that the Church recognized the validity of Protestant marriages between two baptized people, which would make his present marriage invalid unless he got his two previous marriages annulled.

    Parent

    It'll be Newt Gingrich (none / 0) (#8)
    by ruffian on Mon Apr 06, 2009 at 09:24:07 AM EST
    I'm not saying he has a snowball's chance in hell, but he'll run.

    Parent
    If there is enough anger. (none / 0) (#41)
    by AX10 on Mon Apr 06, 2009 at 11:43:20 AM EST
    the people will most likely vote the incumbent out of power.  Unless the challenger is unacceptable, that is.  I am not sure Palin has much of a future.
    They may stick us with Huckabee.  He is a populist and has gone against party orthodoxy while Governor.
    He is a religous fanatic though, and he will try to make Christianity the offical state religion and may involve us in a holy war in the middle east.
    They many try to repackage Romney.

    Parent
    What?! (none / 0) (#44)
    by reslez on Mon Apr 06, 2009 at 11:53:03 AM EST
    2012 is supposed to be Tim Pawlenty's big year. According to him, that is.

    Parent
    I have the same fears about '12 (none / 0) (#23)
    by lilburro on Mon Apr 06, 2009 at 10:29:29 AM EST
    We need to sort out torture issues esp. right now, otherwise we'll be right back where we started, or worse.  Our media still shies away from even calling it "torture."  They'd have fun with Sarah Palin again.

    The future is scary.

    Parent

    If the economy (5.00 / 3) (#51)
    by cal1942 on Mon Apr 06, 2009 at 12:04:57 PM EST
    shows no sign of improvement by 2012 I guarantee you that people won't give a rip about torture or any other issue.

    The only thing they'll care about is the economy and nothing else will register.  Not even a blip.

    Parent

    Sh*t.... (none / 0) (#68)
    by kdog on Mon Apr 06, 2009 at 01:17:40 PM EST
    people don't give a rip about torture now, forget about it if the economy worsens.

    Parent
    Sadly Kdog (none / 0) (#104)
    by cal1942 on Tue Apr 07, 2009 at 04:02:40 PM EST
    you're absolutely right.

    Parent
    I just watched the Moyer's-Black piece. (5.00 / 4) (#21)
    by nellre on Mon Apr 06, 2009 at 10:28:31 AM EST
    Not only has Obama and the democratic congress let us down, our federal government has been betraying America's best interests for decades.
    I feel so disempowered!

    With so little transparency, and no (5.00 / 2) (#75)
    by Anne on Mon Apr 06, 2009 at 01:38:15 PM EST
    signs that we're ever going to get any - what with us little people not being worthy of being trusted with such complex and important information that we probably would just misinterpret to the financial system's detriment - Geithner and the rest of the Boyz can say pretty much whatever they want, and we can spend hours attempting to parse it - to no avail.  

    They are protecting their own - that's been the goal from Day One - and it's disturbing that Obama has just nodded along with the Goldman Sachs branch of his administration; Wall Street is getting a whopping return on those campaign contributions, wouldn't you say?

    I'd like to be able to hope that Elizabeth Warren will shake things up with the report she plans to release, but since we can't count on the media to give it the attention it deserves, I don't have much reason to think that will be the case.

    Hope?  Change?  More like business as usual on the mushroom farm, I think.

    Black Makes Serious.. (4.33 / 3) (#38)
    by santarita on Mon Apr 06, 2009 at 11:29:34 AM EST
    allegations in both the the Moyer's interview and in the the folow-up piece to which BTD linked.  If a bank is insolvent, the PCA requires that government agencies take certain steps.  He alleges that the Obama Administration is engaging in accounting fraud in saying (at present) that some insolvent banks are in fact well-capitalized (for regulatory purposes).   He bases his allegation of insolvency on the apparent paradox of Geithner saying the banks need $2 trillion while at the same time saying that they are well-capitalized.  Now, it may be true that some banks are irremediably insolvent, but that finding would have to be based on more than an apparent paradoxical statement.  

    And as to the accounting fraud charge (which may be true), he doesn't allege facts to back that up (other than the apparently paradoxical statement of Geithner).  So Black isn't doing much more than putting a legal gloss on what a variety of economists have said.  

    The problem with the PCA is that while it does mandate corrective action (in a series of escalating steps depending on the state of capital), the regulators must still make findings on the state of capital.  And there is a lot of discretion as to valuation of assets.  While the regulators can't proceed with impunity.  They face serious litigation if they get it wrong.  And of course serious political consequences.  

    What Black doesn't talk about is the likelihood that at this point, the regulatory agencies are "putting the screws" on several banks very forcefully but very quietly in compliance with the PCA.  And recently there has been some public warnings made.  

    I don't think the government's handling of this mess has been particularly good.  I would have liked to have seen much more government control in terms of formal conditions.  Perhaps some CEO's and boards should have been ousted and civil money penalties sought.  (On the other hand, the government may need their cooperation for awhile.)  But I'm not willing to make unsubstantiated allegations of criminal behavior.

    No, that's not what Black said (5.00 / 4) (#50)
    by lambert on Mon Apr 06, 2009 at 12:04:14 PM EST
    Black said:

    BILL MOYERS: How do they get away with it? I mean, what about their own checks and balances in the company? What about their accounting divisions?

    WILLIAM K. BLACK: All of those checks and balances report to the CEO, so if the CEO goes bad, all of the checks and balances are easily overcome. And the art form is not simply to defeat those internal controls, but to suborn them, to turn them into your greatest allies. And the bonus programs are exactly how you do that.


    Black is talking about accounting control fraud here, which takes place inside the banks, just as he did a month ago over at Yves place.

    So, it is not true to say that Black "alleges that the Obama Administration is engaging in accounting fraud ..." Black develops a critique of the administration, but that is not part of it.

    So, straw man. Sorry!

    Parent

    Read The Linked Article... (5.00 / 3) (#58)
    by santarita on Mon Apr 06, 2009 at 12:26:06 PM EST
    and the Moyers' Interview - "Geithner is charging, is covering up.  Just like Paulson did before him."

    The only way the mandatory provisions kick in is if the regulators make a finding of insolvency.  Black is alleging that they should be making that finding and they are not.  Your citation talks about the accounting control fraud that takes place at the bank.  Black is alleging that the regulators are participating in that fraud by knowing about it and allowing it to continue.  Again read the entire article and the entire interview.

    Parent

    I have done so, of course (5.00 / 3) (#85)
    by lambert on Mon Apr 06, 2009 at 02:10:33 PM EST
     As I said:

    So, it is not true to say that Black "alleges that the Obama Administration is engaging in accounting fraud ..." Black develops a critique of the administration, but that is not part of it.

    You write:

    Black is alleging that the regulators are participating in that fraud by knowing about it and allowing it to continue.

    No, this is what Black says (I'll supply the quote):

    Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion -- a trillion is a thousand billion -- $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true.

    From a public policy perspective, that's awful -- as I'm sure you'll agree. And Obama should be doing something about it -- as I'm sure you'll agree. But to say that Geithner is "participating" in the fraud, you have to know that he has guilty knowledge of it, no? And participated when the fraudulent contracts were written? Show that, and I'm with you.

    Until then, your premise:


    He alleges that the Obama Administration is engaging in accounting fraud

    is false, as is your conclusion derived from that premise:

     But I'm not willing to make unsubstantiated allegations of criminal behavior.

    Since Black isn't making the allegation that you claim is unsubstantiated.

    Parent
    Covering Up Implies ... (2.00 / 1) (#92)
    by santarita on Mon Apr 06, 2009 at 07:27:23 PM EST
    knowledge of the accounting fraud.  Otherwise, how could Geithner, et al be accused of covering up?

    I recognize that Black is using a term of art: "accounting control fraud".  Again, the cover up by Geithner would make him a participant, an enabler of that kind of fraud.

    But he is also accusing Geithner of violation of the PCA for not taking the mandatory action required in the event of insolvency.  Since up to this point, the regulators have been consistent about saying that the banks are well-capitalized, then for Black's allegation to be true, the bank regulators must be lying to us.   Sounds like participation in fraud to me.

    Parent

    Well, sure (none / 0) (#97)
    by lambert on Mon Apr 06, 2009 at 10:47:56 PM EST
    All I'm saying is that you're conflating the term of art with policy problems. It's surely possible that Geithner is guilty of participation in "accounting control fraud" but Black doesn't take that step. You do.


    Parent
    Disagree (5.00 / 5) (#89)
    by standingup on Mon Apr 06, 2009 at 03:08:52 PM EST
    First, the mandatory provisions kick in before insolvency when the tangible equity capital drops below two percent of total assets.  

    Second, Black covers the control fraud at the level of the regulators or state in Why Is Geithner Continuing Paulson's Policy of Violating the Law?:

    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...
    ...
    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.)

    And he covers it at the level of the lenders and originators.  

    Black is looking at the situation with an eye that has been trained, through years of focusing intently on the laws and regulations of this industry.  He is raising attention to red flags that he recognizes and calling for appropriate action.  So he may not have the full facts to substantiate a charge of fraud but as a taxpayer and investor, I am grateful Black is pushing for investigations and accountability.

    Parent

    Thank you for making ... (2.00 / 1) (#93)
    by santarita on Mon Apr 06, 2009 at 07:32:14 PM EST
    my point about participating the in the fraud.  Look at the second paragraph that you quote.  What is he alleging other than participation in a fraud?  

    As to the first paragraph of what you cite, up to this point, the regulators have been saying that the banks are well-capitalized.  So the mandatory provisions have not been triggered.

    Parent

    In my opinion this administration is (none / 0) (#94)
    by Militarytracy on Mon Apr 06, 2009 at 09:52:31 PM EST
    participating in fraud.

    Parent
    Wouldn't be the first or the... (none / 0) (#95)
    by santarita on Mon Apr 06, 2009 at 10:33:29 PM EST
    last to participate in a fraud.  But let's see the facts first.

    Parent
    I really want the facts (none / 0) (#96)
    by Militarytracy on Mon Apr 06, 2009 at 10:37:10 PM EST
    There isn't anything that I want more.  Things are being hidden though.......No?

    Parent
    <B>William Black Was Deceptive</B> (none / 0) (#101)
    by JulieW on Tue Apr 07, 2009 at 05:55:24 AM EST
    Black admits above that the PCA does not apply to the holding companies, but on Bill Moyer he indicates it does.  The major bailouts are going to holding companies, Citigroup, Bank of America, etc that have both commerical banks (FDIC) and investment banks (SEC & CFTC - voluntary)

    FDIC Failed Bank List, they have taken over many banks.
    l
    The information is being posted all over the Internet.

    BILL MOYERS: To hear you say this is unusual because you supported Barack Obama, during the campaign. But you're seeming disillusioned now.

    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.

    GAO Reports that there was no authority to take over the investment banks, but the Federal Reserve can provide money if the bank is a threat to the economy.

    FINANCIAL REGULATION: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System, GAO-09-216,
    January 2009

    On March 26, 2008, Geithner proposed regulations to increase authority

    "Under current law, no regulator has the authority to essentially take over a troubled bank holding company--conglomerates with a wide range of financial operations--the way the government routinely does with smaller, commercial banks."

    Several Republicans voiced opposition.

    Parent

    Black seems to admit (2.66 / 3) (#11)
    by Green26 on Mon Apr 06, 2009 at 10:09:17 AM EST
    that the PCA applies only to "deeply involvent banks" and "involvent banks that cannot be promptly corrected (capitalized)". (See his below quote.) The head of the FDIC says all of the big banks are currently well-capitalized, and thus not close to being involvent.

    "The commentator's secondary argument is that the PCA law does not mandate that deeply insolvent banks be placed in receivership. S(he) points to several discretionary exceptions in the law, but none of the exceptions apply to insolvent banks that cannot be promptly corrected (recapitalized)."

    While I don't know the law in this area, I don't see anything that would prohibit the US government from assisting a bank to improve its capitalization. In fact, a Black quote seems to imply that the regulators can assist the bank in improving its capital (note the "restore them to adequate capital"):

    "Deeply insolvent banks, however, fall into a more severe category under the PCA law. They are "severely undercapitalized," and the law mandates that the bank or the regulators promptly restore them to adequate capital or place them in conservatorship or receivership (and prohibit a wide range of business activities)."

    Black seems to be basing his views on abuse mortgage and accounting fraud.

    "Instead, what is occurring is a coverup designed to evade the PCA that relies on abusive accounting to hide the banks' losses that arose due to mortgage and accounting fraud." "To the extent that outside auditors are unable or unwilling to force banks to recognize losses in their asset portfolios, PCA depends on the effectiveness of bank examinations by the supervisory agencies."

    That's a pretty serious charge, and I believe an allegation of accounting fraud is preposterous.

    In point-of-fact, it has been the outside accounting firms that have used the mark-to-market rule to force the write down of assets to low levels which virtually everyone in or close to the situation believes are unduly low. At least in more recent years, the accounting firms have been very conservative in this area.

     

    Well, if the banks are not deeply insolvent (5.00 / 14) (#27)
    by inclusiveheart on Mon Apr 06, 2009 at 10:51:17 AM EST
    then we should end TARP because the only reason we were started that program was because the commercial banks were supposedly in trouble.  I personally would love to have this whole discussion disappear entirely.  Unless, the new US government standard is to hand out bail out money to every joker who loses money speculating in unregulated markets.  

    Parent
    Indeed (5.00 / 7) (#45)
    by Big Tent Democrat on Mon Apr 06, 2009 at 11:55:32 AM EST
    This is Geithner's Paradox.

    Parent
    Geithner's Paradox (5.00 / 1) (#54)
    by Romberry on Mon Apr 06, 2009 at 12:09:19 PM EST
    Love it! How does one solve this paradox? Is it only an apparent contradiction, or does the paradox reveal...all the answers to time travel and the ABC series "Lost!"?

    Seriously though, the Geithner Paradox has a certain ring to it. Mind if I borrow it? (With attribution of course.)

    Parent

    Liquidity versus Insolvency... (5.00 / 1) (#59)
    by santarita on Mon Apr 06, 2009 at 12:27:55 PM EST
    Geithner apparently believes that the problem is a liquidity crisis that has caused a temporary but not irreversible capital problem for some banks.  That explains the apparent paradox.  

    Parent
    Liquidity problem + time = (none / 0) (#61)
    by Big Tent Democrat on Mon Apr 06, 2009 at 12:33:46 PM EST
    Insolvency?

    Actually, no, a liquidity problem is a type of insolvency. But there are others.

    Parent

    The PCA Is ... (2.00 / 1) (#91)
    by santarita on Mon Apr 06, 2009 at 07:19:54 PM EST
    about liability exceeding assets type of insolvency.

    Parent
    Feel free (none / 0) (#60)
    by Big Tent Democrat on Mon Apr 06, 2009 at 12:32:42 PM EST
    And now Geekeque responds... (5.00 / 2) (#63)
    by inclusiveheart on Mon Apr 06, 2009 at 12:56:34 PM EST
    Something about Krugman and a Brookings paper:

    Brookings

    An interesting paper that has little to do with the substance of his attack on Mr. Black.

    Parent

    You know what that paper does not do? (5.00 / 2) (#65)
    by Big Tent Democrat on Mon Apr 06, 2009 at 01:05:43 PM EST
    It does not "show that even the initial implementation step of taking
    over the banks would be costly, difficult, and risky." But even if it did, it does not show that the Geithner Plan would be preferable to it.

    Parent
    He's in kitchen sink mode now. (5.00 / 3) (#72)
    by inclusiveheart on Mon Apr 06, 2009 at 01:33:44 PM EST
    He has nothing because his purpose is to make sure that no one says anything bad about anything that the Obama Administration does.

    So he can't even engage in an honest exchange about the fact that there are no good options in this situation, because then he'd have to admit that the Geithner option isn't "good" either.

    Parent

    good post there. (none / 0) (#81)
    by Salo on Mon Apr 06, 2009 at 01:53:00 PM EST
    No good options.

    Parent
    Haw (none / 0) (#98)
    by lambert on Mon Apr 06, 2009 at 10:50:07 PM EST
    "Krugman" -- another hate trigger! I imagine The Clenis will be next.

    Parent
    That was one of (5.00 / 6) (#55)
    by cal1942 on Mon Apr 06, 2009 at 12:12:01 PM EST
    Black's points, that if the banks are solvent then why do they need x trillions.  Both can't be true.

    That really says it all.

    Parent

    A very Pollyanna-ish view (5.00 / 2) (#36)
    by reslez on Mon Apr 06, 2009 at 11:21:31 AM EST
    The head of the FDIC says all of the big banks are currently well-capitalized, and thus not close to being involvent.

    If you take this sort of statement at face value forgive me if I think you're either disingenuous or gullible. Everything these agencies say must be filtered. Citibank, for one, is drowning in SIVs and off balance sheet entities. If it were not for the Fed's extraordinary array of lending facilities none of the big guys would be around to beg for bailouts.

    That's a pretty serious charge, and I believe an allegation of accounting fraud is preposterous.

    I guarantee you there has been serious, material accounting fraud. All the incentives are there, including tacit regulator approval, and we have specific instances that fail any kind of smell test. On September 10th the CEO of Lehman Brothers was on TV proclaiming the soundness of his company. 5 days later Lehman went spectacularly bankrupt with billions of dollars in losses. The state of NJ, for one, is suing Lehman execs for fraud on behalf of pension funds. The only reason there hasn't been more scrutiny is because chummy regulators lack the appetite. Heaven forbid we undermine public confidence by subjecting banks to audits. Even the so-called "stress test" has vanished from view.

    No, the administration is more interested in selling its bailout plan than whipping up anger against Wall Street with investigations. Trouble is, sunshine makes the best disinfectant. The mark-to-market rule is poster child for this issue. As they say of democracy, mark-to-market is the worst form of accounting except for all the others that have been tried. We need public disclosure or the markets will never recover.

    Parent

    The accounting fraud... (5.00 / 2) (#39)
    by santarita on Mon Apr 06, 2009 at 11:35:04 AM EST
    unsubstantiated allegation is the only way that he can make the allegation that the Obama Administration is violating the PCA.  

    The gap in the PCA law is that there has to be finding of insolvency  before the mandatory provisions kick in.  The determination of insolvency is where the regulators have some discretion.


    Parent

    No (5.00 / 4) (#40)
    by standingup on Mon Apr 06, 2009 at 11:43:14 AM EST
    Black is basing his views based on what he knows of accounting fraud from years of experience as a regulator, litigator and expert in white collar crime. Take a look at his vita for a better sense of his qualifications in making assertions about fraud.  

    Black gives a better explanation of control fraud and the problems with Geithner's stress tests in an interview with Yves Smith on Naked Capitalism.  

    Parent

    His Only Factual Basis... (5.00 / 1) (#49)
    by santarita on Mon Apr 06, 2009 at 12:03:27 PM EST
    for the accounting fraud allegation is the apparent contradiction of Geithner saying that the banks need $2 trillion but that they are well-capitalized.  (The contradiction can be cleared up if you view the $2 trillion as what is needed to deal with temporary capital and liquidity problem.)

    His background is impressive and I'm sure that he knows the arguments that can be made about valuation of capital assets by supervised institutions.

    He may be correct that there is accounting fraud but he doesn't have the facts to substantiate.

    Parent

    Note that Geithner has NOT said the banks (none / 0) (#67)
    by Green26 on Mon Apr 06, 2009 at 01:17:12 PM EST
    need $2 trillion of additional capital. While Geithner has said some banks may need more capital (and the US is prepared to assist in that regard), the larger figures Geithner has mentioned (or some has said he has mentioned) relate to amounts of money that MAY BE needed to get "consumer and business lending" going and to help fund the TARP program to buy troubled assets.

    As I have said previously, getting the troubled assets, or some of them, off of the banks' books is a goal in and of itself. It is not being proposed just to improve bank capital.

    Parent

    Would you agree that (5.00 / 1) (#69)
    by Big Tent Democrat on Mon Apr 06, 2009 at 01:22:43 PM EST
    the banks that do indeed need capital are insolvent?

    Parent
    I'd have to see a bank's (3.00 / 2) (#79)
    by Green26 on Mon Apr 06, 2009 at 01:47:36 PM EST
    balance sheet and some additional data and explanation, to determine whether a bank was insolvent. Needing or desiring more capital is not necessarily an indication of insolvency.

    Banks raise capital all the time, often for expansion and to increase lending capacity. Markets for bank stock are not good at this time, so banks are reluctant to suffer the dilution (i.e. sell stock at very low prices, and thus have to sell more shares) if they can avoid it.

    Certainly, some banks have more problems than others. Focusing on the ones with more problems, it's likely that they may want more capital, especially more capital from the US, to both weather any future worsening economic storm and/or to increase lending.

    I have looked at the balance sheets of the parents of Citi and BofA. They are clearly solvent.

    On the other hand, a good analysis would need to go much deeper than just looking at the parent balance sheets.

    And of course, a request for more capital could be an indication of concerns about approaching insolvency. My view is that the regulators and Geithner are not likely to fund additional capital unless the bank has a good chance of weathering the storm.

    Parent

    Not an indication of insolvency? (5.00 / 4) (#80)
    by Big Tent Democrat on Mon Apr 06, 2009 at 01:51:05 PM EST
    When you go to the government for a bailout?

    Allrighty then.

    Parent

    No. A bank can need capital for other reasons. (none / 0) (#71)
    by steviez314 on Mon Apr 06, 2009 at 01:33:21 PM EST
    A bank can need capital for regulatory purposes.  If regulators want a Tier 1 cap ratio of 6% instead of 4%, then capital is needed.  Now, that may make a bank insolvent in the regulatory sense, but the actual requirement is artifical and man-made and can be changed.

    A bank also needs capital to make new loans, if it wants to maintain the same ratio.

    Now, if a bank needs new capital in order to pay off existing liabilities that come due, and cannot do so by selling assets, THEN it would be insolvent.

    Parent

    Ah (5.00 / 1) (#74)
    by Big Tent Democrat on Mon Apr 06, 2009 at 01:37:20 PM EST
    Well as long as we can change definitions, I say we rename banks and call them dog tracks.

    Parent
    Please tell me what definition I changed. (none / 0) (#76)
    by steviez314 on Mon Apr 06, 2009 at 01:41:31 PM EST
    Insolvency means the inability to pay one's debts as they fall due. Usually used in Business terms, insolvency refers to the inability for a 'limited liability' company to pay off debts.

    This is defined in two different ways:

    Cash flow insolvency -
    Unable to pay debts as they fall due. An indicator of this on the balance sheet, is if there is "net current liabilities".
    Balance sheet insolvency -
    Having negative net assets: liabilities exceed assets; or net liabilities.
    A business may be cash flow insolvent but balance sheet solvent if it holds illiquid assets, particularly against short term debt. Conversely, a business can have negative net assets showing on their balance sheet but still be cash flow solvent if ongoing revenue is able to meet debt obligations, and thus avoid default - for instance, if it holds long term debt.



    Parent
    None (none / 0) (#82)
    by Big Tent Democrat on Mon Apr 06, 2009 at 01:54:11 PM EST
    You DID state this:

    "If regulators want a Tier 1 cap ratio of 6% instead of 4%, then capital is needed.  Now, that may make a bank insolvent in the regulatory sense, but the actual requirement is artifical and man-made and can be changed."

    You are stating that if we changed the "regulatory" definition of "insolvency," then banks won't be insolvent.

    I agree with you. I would add if we change the applicability of mark to market accounting practices regarding illiquid assets, we can increase their book value as well.

    And my proposal is to start calling those things we once referred to as "banks" and start calling them "dog tracks."

    Parent

    Inadequate regulatory capital is not an automatic (none / 0) (#84)
    by steviez314 on Mon Apr 06, 2009 at 02:02:22 PM EST
    declaration of insolvency or a legal one and can in fact be foreborn (or is that forebeared).

    In fact, regulatory ratios should be countercyclical--they should be higher during good times in preparation for the bad ones, and then loosened during recessions.  That they are not designed this way is one of the many causes of our current problems.

    Parent

    They are not banks (none / 0) (#83)
    by Salo on Mon Apr 06, 2009 at 01:54:24 PM EST
    that's a bad bad work. They are Money Pens.  

    Parent
    BTD, is receivership mandatory? (none / 0) (#17)
    by ding7777 on Mon Apr 06, 2009 at 10:17:54 AM EST
    Greekesque was critical of Black stating that receivership was mandatory when the PCA allows "other action" (like a government bailout?)

    (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; or
    (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.



    Geekesque left out the section (5.00 / 4) (#20)
    by inclusiveheart on Mon Apr 06, 2009 at 10:22:50 AM EST
    just below "take such other action" that states that if "other action" does not work after 270 days - they have to go back to plan "A i".

    Read the whole statute. And read Blacks entire response.  It is worth it.

    Parent

    You mean geekesque took the quote... (5.00 / 4) (#46)
    by lambert on Mon Apr 06, 2009 at 11:56:36 AM EST
    ... out of context?

    I'm shocked.

    Parent

    You mean geekesque took the quote... (5.00 / 1) (#47)
    by lambert on Mon Apr 06, 2009 at 11:56:41 AM EST
    ... out of context?

    I'm shocked.

    Parent

    You're apparently (5.00 / 2) (#56)
    by TeresaInSnow2 on Mon Apr 06, 2009 at 12:12:28 PM EST
    doubly shocked ;-)

    Parent
    And why not (5.00 / 2) (#57)
    by cal1942 on Mon Apr 06, 2009 at 12:20:24 PM EST
    Mousing equivalent ... (none / 0) (#90)
    by lambert on Mon Apr 06, 2009 at 06:21:24 PM EST
    ... of leadfoot, I guess!

    Parent
    So is receivership (none / 0) (#28)
    by ding7777 on Mon Apr 06, 2009 at 10:51:27 AM EST
    mandatory or not? I'm guessing its not, but would the TARP and bailout $$ be considered "other action"?

    And re the 270 days thingy,  again the FDIC may continue to take "other action" instead of receivership.

    Does Black know what this "other action" could be?

    Parent

    It seems to be mandatory. (5.00 / 3) (#31)
    by inclusiveheart on Mon Apr 06, 2009 at 11:03:16 AM EST
    Did you read the statute and Black's response to Geekesque?

    Parent
    Mandatory (5.00 / 2) (#37)
    by reslez on Mon Apr 06, 2009 at 11:29:07 AM EST
    Receivership is mandatory. There is a very good reason the law was written that way: as we saw in the GD, lost confidence is like a disease. If bank insolvencies are not quickly resolved they fester and spread, infecting the entire financial sector. That's the situation we're in now with a great deal of uncertainty and bearish sentiment among investors. And that's why you have the head of the FDIC saying otherwise ridiculous things like the banks are not insolvent: if they were, they would be forced into receivership.

    Parent
    Receivership is NOT mandatory. (4.00 / 2) (#64)
    by Green26 on Mon Apr 06, 2009 at 01:00:17 PM EST
    Again, these are Black's own words:

    "Deeply insolvent banks, however, fall into a more severe category under the PCA law. They are "severely undercapitalized," and the law mandates that the bank or the regulators promptly restore them to adequate capital or place them in conservatorship or receivership (and prohibit a wide range of business activities)."

    Black says the law mandates that the bank or regulators promptly restore them to adequate capital OR place them in receivership.

    I don't know the exact status of the banks' capital at the time of the capital injections, but the banks are currently "well-capitalized", according to the head of the FDIC.

    Parent

    And we know he would never lie (none / 0) (#73)
    by Amiss on Mon Apr 06, 2009 at 01:34:22 PM EST
    the banks are currently "well-capitalized", according to the head of the FDIC.



    Parent
    non banks (none / 0) (#29)
    by shaharazade on Mon Apr 06, 2009 at 10:56:13 AM EST

    these giant entities, that have been allowed to become enmeshed with wall street, could be busted up using anti trust laws, The Sherman Act? The government could also reinstate Glass-Seagal, which would get them unhooked from the real banks. Why won't this administration, use the laws on the books to bust them up regulate them and then disperse the TARP money? The current plan seems ass backward. It seems to me that the Goldman-Saks guys who run treasury and it's subsidiaries are not interested in any solution that involves the legislative branch or the laws that are on the books already. If this mess is as big as they say why not pass legislation that takes it out of the hands of the players who both created it and ideologically believe in it.          

    Genet's 'The Balcony' (none / 0) (#70)
    by oldpro on Mon Apr 06, 2009 at 01:28:22 PM EST
    comes to mind.

    Why does the worid "defenestration"... (none / 0) (#99)
    by lambert on Mon Apr 06, 2009 at 10:51:10 PM EST
    ... come to my mind?

    Parent
    You tell me! That could cover (none / 0) (#100)
    by oldpro on Tue Apr 07, 2009 at 02:36:10 AM EST
    a lot of ground, from humor to musical to fantasy.

    I think the current version involves 'throwing folks under the bus' as opposed to 'out the window.'

    Your take?

    Parent

    Heh (none / 0) (#102)
    by lambert on Tue Apr 07, 2009 at 01:24:42 PM EST
    Should make up a new Latin word

    subomnibusification or some such.

    Parent

    Heh, yosef...new word needs work! (none / 0) (#103)
    by oldpro on Tue Apr 07, 2009 at 02:00:28 PM EST