Bank v. U.S.

http://www.futureofcapitalism.com/2010/03/bank-v-us

The U.S. Court of Appeals for the Federal Circuit handed down an opinion yesterday in a case known as Bank v. U.S. The opinion, by Judge William Bryson, a Clinton appointee who clerked for Justice Thurgood Marshall, is remarkable for its account of how the government went back on a deal it made with a bank. That breach of a promise essentially forced Anchor Savings Bank (now part of JPMorgan Chase) to sell off a mortgage banking company called Residential Funding Corporation to General Motors Acceptance Corporation. Judge Bryson and two of his collegues upheld a ruling ordering the government to pay JPMorgan Chase at least $356 million in damages. From the opinion:

RFC was an industry leader at the time Anchor purchased it. In the first quarter of 1988, RFC was the largest issuer of private MBS in the nation. RFC generated over $10.5 million in net profit in its first year under Anchor and $7.8 million in net profit during the first seven months of the following year. The business was highly successful and fit well with Anchor's long-term business plans.... In mid-1989, Anchor's CEO wrote that RFC "continues to fly" and was "authorized to double its volume in 1990." At about the same time, Anchor and RFC developed a business plan designed to expand RFC's business into other areas.

On August 9, 1989, Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act, Pub. L. No. 101-73, 103 Stat. 183 (1989) ("FIRREA"). The new statute—and particularly its implementing regulations, which were announced in October 1989—effectively terminated the favorable treatment of supervisory goodwill that had been promised to Anchor at the time of the supervisory mergers. The sudden eradication of more than half a billion dollars of regulatory capital caused Anchor to fall out of capital compliance by more than $300 million. Facing the threat of seizure and liquidation by the government, Anchor scrambled to raise the necessary capital through a swift series of asset sales. Those sales resulted in the divestiture of RFC...

There are so many points here that are potentially analogous to our current situation that it is hard to know where to begin.

The FutureOfCapitalism.com reader who sent it to me described it as another reason why regulation doesn't work. You can't even trust the regulators to honor a deal (especially when they are just giving away free money to their favorites).

Another point is the downside of those regulatory capital requirements or restrictions on leverage for banks that everyone from the Manhattan Institute's Nicole Gelinas to the Wall Street Journal's Heard on the Street column and Bloomberg News columnist Roger Lowenstein seem to think are a good idea. Sometimes, to meet these capital requirements, banks are forced to sell off assets at fire-sale prices that would end up being worth more if they just held on to them for some time. Never mind the infringement on property rights and freedom that goes with a regulator essentially forcing a bank to sell an asset; even from the standpoint of what's best for sturdy bank balance sheets in the medium to long term, such a sale may not make sense. There are all kinds of government-forced asset sales going on now at places such as Citigroup, GM, and AIG. Who knows whether the sold-off businesses will end up being worth more eventually than the price they were sold off for?

A penultimate point is, where is the press on all this? There's a Bloomberg article (not available on the Web), which notes a lower court could increase the verdict by another $163 million, bringing the total to $519 million. That should be more than enough to cover JPMorgan's legal fees to its lawyers at Jones Day, who probably are wishing they took this one on a contingency fee basis. The Bloomberg article doesn't address any present-day parallels.

But given the attention the press pays, justifiably, to boondoggles and government errors that wind up costing the taxpayers a lot less money -- $55,000 of federal stimulus money to spay and neuter dogs and cats of low-income residents of Wichita, Kansas; "a $6 million snowmaking facility in Duluth, Minn.," and "a $3.4 million 'ecopassage' to help turtles cross a highway in Tallahassee, Fla. -- you'd think a broken promise that may end up costing the taxpayers $519 million would be worth some wider press attention.

Oh, and one last point: Anyone who thinks that the arbitrary use of government power against shareholders of financial institutions began with President Obama, or is just a feature of Democratic administrations, is kidding themselves. The promises at issue in this lawsuit were broken by Congress and the administration in 1989.

by Editor  |  Mar 11, 2010 at 9:50 am Related Topics:  AIG, Auto Industry, Banking, Capital Markets Regulation, FDIC, Federal Reserve, Government ownership, Press, Timothy Geithner receive the latest by email: subscribe to the free futureofcapitalism.com mailing list