Be Afraid... And Rightly So
Troy Racki
April 28, 2009
If you think our financial regulators need more authority, then you might want to think twice. Over the past seven months, pieces of a very disturbing puzzle have begun to come together. These pieces began to surface in October when the FDIC seized Wachovia Bank and tried sell the company to Citibank for pennies on the dollar. Many considered it a steal of a deal. Turns out Wells Fargo was thinking the same thing and days later offered seven times more than Citibank, and more specifically, without taxpayer concessions. SmartMoney magazine wrote a piece on the matter stating:
"Then Wells came on the scene. It offered to buy Wachovia for $7 a share and told the FDIC that it didn't need any investment or any guarantees. Believe it or not, Citi had the gall to sue to block Wells' offer even though in every dimension it was superior for Wachovia stakeholders and for the American taxpayer."
"You have to wonder what the FDIC was thinking in the first place. Citi had to take two huge capital injections from the U.S. Treasury under the TARP program in order to survive, and it had to have the Federal Reserve guarantee $300 billion of its toxic assets. So what was the point in having a bank that screwed up take over Wachovia?"
(http://www.smartmoney.com/Investing/Stocks/Will-Wells-Fargo-Herald-The-Return-of-Bank-Stocks/?afl=yahoo)
In December, at Bank of America, CEO Ken Lewis was considering dropping out of the Merrill Lynch merger after billions more in losses had been taken by the investment brokerage since the dealīs original announcement. But when Mr. Lewis considered pulling out Ben Bernanke and then-Treasury Secretary Henry Paulson pressured him to hold his tongue and follow through, as reported by CNN. Because of this Bank of America had to swallow those losses, and the taxpayer, through TARP, are the ones left holding the bag.
(http://money.cnn.com/2009/04/23/news/companies/BofA_Lewis.reut/index.htm?section=money_topstories)
Meanwhile a perfectly sound private bank worth $250 billion was told by the FDIC and the Treasury that it had to accept TARP money or face the humiliation of having its books dragged across the public stage, as told on air by Fox News. (http://www.youtube.com/watch?v=sR12TFI2nJI) While its books wouldn't have lost a page, just the act of being in the public eye would have set its business aflame as potential clients would have bailed from a supposed sinking ship. The on air judge stated that the action taken by the government was extortion. Besides the government earning a 5% return on their money, now the government's 2% stake means it can tell the bank how to run their business. Should not a well operated business have the right to run itself?
Well FDIC chairwoman Sheila Blair doesn't agree. She wants more power. As reported by the New York Times, besides banks themselves, Blair is now seeking the authority to take over insurers, bank holding companies and other financial institutions deemed by the FDIC as insolvent.
(http://www.nytimes.com/2009/04/28/business/economy/28fdic.html?ref=global-home)
As both taxpayers and investors we should be concerned. Giving the FDIC the power to declare more businesses insolvent, such as Wachovia, and then pass them along to whomever they please, such as Citibank, is very frightening. As seen by the inability of the FDIC to gauge true market value, one could predict that the FDIC could pass unjustified billions from one entity to another, whether accidentally or not, all while granting guarantees compliments of the taxpayer.
If Chairwoman Blair does receive this vast power, investors are likely going to withdraw from many financial institutions out of fear of possible abuse. This would result in a very significant and wide spread pullback in the market. General Electric, for example, would seem like it would not apply to Blair's reach but it does through its GE Financial arm. In fact, the SEC has thousands of publicly traded businesses listed as being "financials". When a temporary ban on the short selling of financially classified companies was issued in September 2008, the vastness of this list became evident. If allowed, Sears and American Express, for example, could soon fall under the FDIC's microscope.
Should the FDIC have even more authority when there is cause for significant concern regarding their track record? Does the Treasury have the publicīs interest best in mind? Who is protecting the taxpayer? The investor? Relaxing our sense of caution and ceding more freedom, whether in good times or bad, is a recipe for disaster. Giving our regulators more authority, when it has proven there should be significant concerns about their judgement, is just cause for alarm.
"Then Wells came on the scene. It offered to buy Wachovia for $7 a share and told the FDIC that it didn't need any investment or any guarantees. Believe it or not, Citi had the gall to sue to block Wells' offer even though in every dimension it was superior for Wachovia stakeholders and for the American taxpayer."
"You have to wonder what the FDIC was thinking in the first place. Citi had to take two huge capital injections from the U.S. Treasury under the TARP program in order to survive, and it had to have the Federal Reserve guarantee $300 billion of its toxic assets. So what was the point in having a bank that screwed up take over Wachovia?"
(http://www.smartmoney.com/Investing/Stocks/Will-Wells-Fargo-Herald-The-Return-of-Bank-Stocks/?afl=yahoo)
In December, at Bank of America, CEO Ken Lewis was considering dropping out of the Merrill Lynch merger after billions more in losses had been taken by the investment brokerage since the dealīs original announcement. But when Mr. Lewis considered pulling out Ben Bernanke and then-Treasury Secretary Henry Paulson pressured him to hold his tongue and follow through, as reported by CNN. Because of this Bank of America had to swallow those losses, and the taxpayer, through TARP, are the ones left holding the bag.
(http://money.cnn.com/2009/04/23/news/companies/BofA_Lewis.reut/index.htm?section=money_topstories)
Meanwhile a perfectly sound private bank worth $250 billion was told by the FDIC and the Treasury that it had to accept TARP money or face the humiliation of having its books dragged across the public stage, as told on air by Fox News. (http://www.youtube.com/watch?v=sR12TFI2nJI) While its books wouldn't have lost a page, just the act of being in the public eye would have set its business aflame as potential clients would have bailed from a supposed sinking ship. The on air judge stated that the action taken by the government was extortion. Besides the government earning a 5% return on their money, now the government's 2% stake means it can tell the bank how to run their business. Should not a well operated business have the right to run itself?
Well FDIC chairwoman Sheila Blair doesn't agree. She wants more power. As reported by the New York Times, besides banks themselves, Blair is now seeking the authority to take over insurers, bank holding companies and other financial institutions deemed by the FDIC as insolvent.
(http://www.nytimes.com/2009/04/28/business/economy/28fdic.html?ref=global-home)
As both taxpayers and investors we should be concerned. Giving the FDIC the power to declare more businesses insolvent, such as Wachovia, and then pass them along to whomever they please, such as Citibank, is very frightening. As seen by the inability of the FDIC to gauge true market value, one could predict that the FDIC could pass unjustified billions from one entity to another, whether accidentally or not, all while granting guarantees compliments of the taxpayer.
If Chairwoman Blair does receive this vast power, investors are likely going to withdraw from many financial institutions out of fear of possible abuse. This would result in a very significant and wide spread pullback in the market. General Electric, for example, would seem like it would not apply to Blair's reach but it does through its GE Financial arm. In fact, the SEC has thousands of publicly traded businesses listed as being "financials". When a temporary ban on the short selling of financially classified companies was issued in September 2008, the vastness of this list became evident. If allowed, Sears and American Express, for example, could soon fall under the FDIC's microscope.
Should the FDIC have even more authority when there is cause for significant concern regarding their track record? Does the Treasury have the publicīs interest best in mind? Who is protecting the taxpayer? The investor? Relaxing our sense of caution and ceding more freedom, whether in good times or bad, is a recipe for disaster. Giving our regulators more authority, when it has proven there should be significant concerns about their judgement, is just cause for alarm.
Print
Email
