FDIC Chair Gruenberg Stunningly Admits That Prior to the Financial Crisis They Had No Plans To Address a Big Bank Failure!

“In what can only be described as a stunning revelation, the current head of the Federal Deposit Insurance Corp., Martin Gruenberg, said in a speech on Oct. 13 that ‘prior to the recent crisis, the major national authorities here and abroad did not envision that these large, systemically important financial institutions (SIFIs) could fail, and thus little thought was devoted to their resolution.’….First, problems with big banks are not new. Six of the top 50 banks in the country in 1980 failed during the banking crisis of the 1980s and early 1990s. At least another 11 of the top 50 banks experienced high-profile problems that eventually led to their sale….In a country that has seen 3,000 banks fail over the past 30 years and more than 12,000 over the past century, it is not difficult to imagine future bank failures.” Richard J. Parsons, author “Broke: America’s Banking System”

“And the FDIC sued me for being a negligent banker? I served on the Federal Reserve System’s Thrift Institutions Advisory Council in 2008; serving on this committee until just after IndyMac Bank’s seizure in July, 2008. (Ironically, the FDIC itself recommended me to serve on this committee during the very time in 2007 that they later claimed using disclosures from SEC filings available at that time, that I was a negligent banker!!!). During this time, current FDIC Chairwoman Sheila Bair met with our committee and I recall that one of the other members asked her if she planned to offer ‘open bank’ assistance to institutions they insured. She responded bluntly, ‘No. We only have a few troubled institutions and they are small (relative to our insurance fund). We will close them down.’ The point being, she and her agency had absolutely no clue that the global financial crisis was soon to be upon us (Bear Stearns failed just weeks later) and that it would jeopardize the entire U.S. and global banking system; Ben Bernanke testified before the FCIC that 13 of the 14 largest financial institutions in the U.S. were in imminent danger of failing in the Fall of 2008. Under Bair and her predecessors, the FDIC insurance fund had not collected deposit insurance premiums from the banking system for a decade through 2006, even though the fund was undercapitalized relative to prior U.S. banking crises and the growth in deposits in the banking system. As a result, the FDIC insurance fund became insolvent during the financial crisis. And it would have been a lot worse for the FDIC without TARP; a program that Bair has strongly and hypocritically criticized to this day. If TARP had not happened, the FDIC insurance fund’s insolvency would easily have grown to be hundreds of billions, if not more. The FDIC approved IndyMac Bank’s non-diversified, nonconforming, mortgage banking business model for deposit insurance in 2000. They seized IndyMac Bank in 2008 and because they were ill-equipped to manage it and chose not to draw on their line of credit with the U.S. Treasury, they fire-sold IndyMac Bank’s assets at the bottom of the market in early 2009, when even Ms. Bair said at the time ‘markets for assets are irrational’. In my opinion, the FDIC has had a long-standing practice of blaming honest and capable bankers during crises, rather than taking responsibility for their own decisions.” Mike Perry, former Chairman and CEO IndyMac Bank

(Please Note: I was personally sued in a civil lawsuit by the FDIC-R in July 2011 for $600 million and accused of being a negligent banker, because I alone didn’t foresee the housing and mortgage market meltdown and global financial crisis coming. Neither did the FDIC or just about anyone else. The FDIC-R expected me to be omniscient and cut IndyMac’s mortgage lending volumes in about a six month period in 2007 by an additional $10 billion more than I was already doing. I settled this matter by personally paying the FDIC-R $1 million, an amount that was neither a fine nor penalty, and I denied the FDIC-R’s allegations in the settlement agreement. The FDIC-R acknowledged in writing in the settlement agreement that they never alleged that my actions caused the bank to fail or the insurance fund to suffer a loss. For more details of the FDIC-R’s legal matter against me see the FDIC tab on this blog and/or Statements #35 and Statement #39, dated January 9, 2013 and February 4, 2013, respectively.)

http://online.wsj.com/news/articles/SB10001424052702303680404579140101524572892?mod=wsj_streaming_stream

OPINION

Sending a Bad Message to Big Banks

The feds’ hypocrisy about J.P. Morgan’s takeover of Bear Stearns will make other banks wary in the next crisis.

By

RICHARD J. PARSONS
Oct. 20, 2013 8:04 p.m. ET
In what can only be described as a stunning revelation, the current head of the Federal Deposit Insurance Corp., Martin Gruenberg, said in a speech on Oct. 13 that “prior to the recent crisis, the major national authorities here and abroad did not envision that these large, systemically important financial institutions (SIFIs) could fail, and thus little thought was devoted to their resolution.”That statement, with its astonishing lack of historical perspective, should be kept in mind when considering the news that emerged over the weekend of a deal in the works for J.P. Morgan Chase to pay a staggering $13 billion penalty to resolve various civil investigations into its conduct over the past several years. A sizeable part of the settlement reportedly would involve penalizing J.P. Morgan Chase for the actions of Bear Stearns—a failing bank that the government persuaded J.P. Morgan to take over in 2008—in the mortgage-backed securities business. Such a penalty would be set a terrible precedent and send a dangerous signal to the financial system.What makes Mr. Gruenberg’s statement so surprising?First, problems with big banks are not new. Six of the top 50 banks in the country in 1980 failed during the banking crisis of the 1980s and early 1990s. At least another 11 of the top 50 banks experienced high-profile problems that eventually led to their sale.

In his 1986 book, “Bailout,” former FDIC Chairman Irvine Sprague identified Continental Bank as “too big to fail,” writing that “scores of large and small institutions—perhaps hundreds—would have been in serious jeopardy if Continental could not have met its commitments.”

Second, the FDIC has had a long-standing practice of turning to strong, bigger banks to step in when their weaker, smaller sisters failed or hemorrhaged capital. Sprague described the need to find “well-managed” banks “approximately twice as large as the bank to be acquired.” As big banks failed, even bigger banks were needed to step in and run the failed bank.

Bank of America, where I once worked, played a significant role in stabilizing the banking system when it acquired two large failed Texas banks in 1988. Over the next seven years, it acquired other banks on the brink of failure. In all cases—and at risk to its own shareholders—Bank of America took immediate action to infuse capital and management into these other ailing institutions.

What Bank of America did in 1988 was no different from what Wells Fargo and J.P. Morgan Chase did 20 years later. At the height of the most recent financial crisis, federal bank supervisors asked them to buy Wachovia, Washington Mutual and Bear Stearns. Largely because of these transactions, by year-end 2008 Wells’s assets had grown 127% over the prior year while J.P. Morgan Chase’s grew 39%.

The third point to be kept in mind about the FDIC chairman’s assertion: Thirty of what were the 50 largest banks in the country in 1980 are now part of Bank of America, Wells Fargo and J.P. Morgan Chase. These three banks are large in part because of their willingness and consistent ability to help bank supervisors calm local and global financial markets—to become part of the solution when the financial system was in danger.

Fourth, and most important: If it is true that J.P. Morgan Chase must pay penalties for mistakes made by Bear Stearns—a firm that Washington encouraged them to take over—then it is likely federal policy makers have actually increased systemic risk to the financial system. In a country that has seen 3,000 banks fail over the past 30 years and more than 12,000 over the past century, it is not difficult to imagine future bank failures.

The FDIC chairman said “little thought was given” to resolving the big-bank crisis, and now equally little thought seems to have been given to the pursuit of J.P. Morgan Chase over Bear Stearns. Once the government proves itself to be an unreliable “partner” in resolving failed institutions, it will find fewer banks willing to step in next time there is systemic risk to the banking system.

Mr. Parsons, a former Bank of America executive vice president, is the author of “Broke: America’s Banking System” (RMA, 2013).

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Posted on October 21, 2013, in Postings. Bookmark the permalink. Leave a comment.

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