The FDIC Must Be Indicted
Courtesy of Karl Denninger at The Market Ticker
Yeah, ok, the title is dramatic and will never happen.
Nonetheless, if we were truly a nation of laws, it would happen.
The LA Times notes regarding IndyMac depositors over the insurance limit:
The head of the Federal Deposit Insurance Corp. delivered some bad news personally to uninsured depositors who lost money last year when IndyMac Bank crashed and burned, saying an act of Congress is their only hope for recovering their funds.
“When a bank fails, we have to do what’s least-cost to our deposit insurance fund,” FDIC Chairman Sheila Bair said during a public appearance Wednesday in Los Angeles.
Sheila is correct as far as she goes, but like most government employees, it is what she didn’t say that is the problem, not what she did.
The problem lies with the willful and intentional refusal to enforce black-letter law, in this case Title 12, Chapter 16, Section 1831o which says in part:
Each appropriate Federal banking agency and the Corporation (acting in the Corporation’s capacity as the insurer of depository institutions under this chapter) shall carry out the purpose of this section by taking prompt corrective action to resolve the problems of insured depository institutions.
"Shall" is a specific term of art in legislation. It allows no discretion and mandates action. "May" and "Can" are two other words of course, and mean what they say – as does "shall."
This section of the law goes on to define capitalization "buckets," each of which represents a level above water, or above zero, of the excess of assets .vs. liabilities for depository institutions.
It also contains plenty of other "shall" directives such as:
Each appropriate Federal banking agency shall—(A) closely monitor the condition of any undercapitalized insured depository institution;(B) closely monitor compliance with capital restoration plans, restrictions, and requirements imposed under this section; and(C) periodically review the plan, restrictions, and requirements applicable to any undercapitalized insured depository institution to determine whether the plan, restrictions, and requirements are achieving the purpose of this section.
and plenty more.
Everyone should go read that section of law, and note all the shall requirements in there.
These are not suggestions, they are mandates, and if they were followed each and every bank that has been closed by the FDIC would have resulted in ZERO loss to uninsured depositors.
The reason for this is simple, when you get down to it – a bank’s "capital structure" looks like this (roughly) in terms of claims against a failed institution:
- Advances and loans/liens by the government (e.g. employment taxes and liabilities)
- Deposit liabilities
- Senior secured debt (bondholders)
- Senior unsecured debt (bondholders)
- Ordinary debt (bondholders)
- Preferred stockholders (hybrid stock/bondholders)
- Common stockholders
- Excess capital (retained earnings, etc.)
As you can see in a liquidation depositors are subordinate only to statutory preference for employment and similar related claims; the entire capital structure of the firm has to be wiped out before depositors take any loss whatsoever.
If assets are properly valued at all times by government examiners and the bank is closed in accordance with the black-letter requirements of Prompt Corrective Action, then in a liquidation the depositors will never lose any money and neither will the FDIC’s Deposit Insurance Fund.
It is in fact willful and intentional blindness by government agencies, including but not limited to allowing financial institutions to lie about the value of their assets, that has resulted in these losses being sustained by ordinary Americans.
Sheila Bair and the rest of the government’s "apparatus", including the OTS and OCC, will undoubtedly claim "sovereign immunity" from suit, even though in the instant case, that of IndyMac, the OTS’ own inspector general has disclosed that an OTS employee and persons at IndyMac conspired together to back-date deposits, thereby distorting the bank’s financial condition, and there is now a 100-bank set of history on FDIC seizures that shows the FDIC has not been and still is not following the black letter requirements of Prompt Corrective Action.
We the people must not accept this sort of malfeasance and misfeasance. These losses sustained by ordinary Americans are not the result of bad luck or even bad decisions by the banks that have failed.
Instead, these losses taken by ordinary Americans occurred as a direct result of malfeasance and misfeasance by the OTS, OCC and FDIC itself.
To be blunt, if you lost money as a consequence of being an uninsured depositor at IndyMac that loss occurred as a direct consequence of the willful blindness (or worse) of government agencies who have intentionally and wantonly refused to obey the mandates set before them under black-letter law.
You were, in essence, robbed by the government.
