What is a financial institution?

Senator Bob Corker had a good exchange with Ezra Klein on the financial reform bill this week. Basically he is uncomfortable with all the hyperbole his fellow Republithugs are throwing around trying to kill the financial reform bill. Corker says that the issue here is not philosophical disputes between the two parties, but technical changes to make sure the language of the law accords with its intent. Sounds very reasonable.

But then he says:

The way the language is written right now, the resolution process could be used on an auto company. We want this clearly, solely to apply to financial institutions. That's just one example of a definition type of thing that has to be dealt with.

Here's the problem -- auto companies are financial institutions. Many companies, from Nordstrom to Sears to General Motors, have bank and thrift charters or hybrid Federal Deposit Insurance Corp.-insured industrial loan companies (ILCS). Walmart is currently aggressively working to become a financial institution. I don't want to add to Walmart's bottom line but I also don't want them offering financial services without oversight and the only way to exercise oversight is through regulation and the threat of our ability to revoke their charter.

So what is he talking about? I'm going to be very interested to see how Senator Corker threads this needle.

Legalized Cookin' the Books

While we're all focused on health care and spree shootings, bankers are quietly trying to sneak a new law in that would legalize falsifying financial statements.

We've been waiting for regulatory reform of the financial services industry and what we're getting instead is a permission for banks to use smoke and mirrors. Banks are trying to get Congress to agree that the next time there's a big downturn, they should have the ability to alter their accounting standards -- essentially, fudge the numbers -- so that the public and investors won't be able to tell how insolvent they really are. By ignoring their declining asset values, they can avoid the standard requirement of raising more capital. This is a Democrat sponsored bill. Rep. Ed Perlmutter, D-Colo., wants to amend the Financial Stability Improvement Act of 2009. Perlmutter’s proposal would hand over responsibility for overseeing accounting standards to the agencies being contemplated to oversee systemic risk, which could allow most companies to never comply with the law, and if that doesn't do enough harm it would also mandate a study to see whether it would be a good idea to exempt additional ones as well.

Sarbanes-Oxley was passed, almost unanimously, by a Republican-controlled House and a Democratic-controlled Senate. Now a Democratic Congress is gutting it with the apparent approval of the Obama administration. Wednesday they passed an amendment that exempt small and mid-size companies from audits required under the Sarbanes-Oxley corporate-reform law. Now they start sidsussing whether to extend these powers to the financial services. I don't understand why we're even considering this.

The American Bankers Association is now pushing Congress to give a new systemic risk regulator — either the Federal Reserve or some panel of regulators — the power to override accounting standards. The view of the bankers is that the financial crisis did not stem from the fact that the banks made lots of bad loans and invested in dubious securities; it was caused by accounting rules that required disclosure when the losses began to mount.

I can't believe I'm on the same side of an issue as the Chamber of Commerce but bad laws make strange bedfellows.

Of course the Chamber is looking at it in terms of investors but my point of view is that of a regulator. People think regulators have all the power and we can close financial institutions on a whim. Not so, generally we watch financial institutions that we know are not survivable limp along and waste away until they at last become insolvent and we can grab control. But by then it's too late to save anything so we end up liquidating It would really save money if we could conserve earlier rather than waiting until they are a corpse or zombie. If this new bill passes, it could become impossible to recognize an insolvent financial institution.

Braney Frank hasn't weighed in yet. I hope he comes with some common sense.

Nationalizing Financial Institutions

Disclosure: I have been a financial institution regulator since the 70's

All the bluster, outrage and discussion about nationalizing financial institutions reminds me of that great line in Casablanca:

Captain Renault: I'm shocked, shocked to find that gambling is going on in here!

We do it all the time. We nationalize financial institutions frequently -- in recent months it's done weekly. We just call it "conservatorship".

When an insured financial institution is found unsafe and unsound, the regulator has many powers, one of which is conservatorship. This power is used frequently primarily because once a financial institution is under conservatorship: the Agency can repudiate contracts, leases, commitments, or any other threats to the assets of the financial institution. This often makes it the preferred method of handling an unsafe and unsound situation. They can replace management or direct them. They can close offices or open new ones. The stock holders are paid nothing and go away and the Agency becomes the governing body. We can operate it, liquidate it, split it into "good" and "bad" banks, sell off assets, "sell" deposits, merge it, convert it -- do whatever is in the best interest of the deposit insurance fund and therefore the Nation.

It is nationalization and it has been working fine since the 30's and we didn't all become Communists or close down capitalism because of it.

It is a boogeyman argument and I'm tired of it.

Here's a press release announcing a conservatorship last year. See if you can tell the difference between conservatorship and nationalize:

Valley Credit Union Placed In Conservatorship
Valley Credit Union is Open and Operating, Member Accounts are Safe and Federally Insured

September 3, 2008, Alexandria, Va. -- The National Credit Union Administration (NCUA) yesterday assumed control of the operations of Valley Credit Union, a state-chartered, federally insured credit union headquartered in San Jose, California.

The California Division of Financial Institutions appointed NCUA as conservator after placing Valley Credit Union into state conservatorship. NCUA will operate the credit union with a goal of continuing credit union service to the members and to ensure safe and sound credit union operations.

Service continues uninterrupted at Valley Credit Union and members are free to make deposits, access funds, make loan payments and use share drafts. While the credit union was placed into conservatorship because of declining financial condition, the decision to conserve a credit union enables the institution to continue normal operations with expert management in place. . .

I wish they would shut the F up and just let us do our jobs. Quit trying to scare the public. Nationalizing is not the boogeyman CNBC is trying to sell.

(cross posted over at Daily Kos)