The Corporate Observer Blog : Consumer Protection, Corporate Abuse : Class Action Lawyer & Attorney : Steven Berk Law Firm

Yesterday, regulatory heads from the SEC, Federal Reserve, FDIC, and CFTC addressed two congressional subcommittees regarding the Volcker Rule.  They showed spine, commitment and solidarity towards the Rule, which should give heart to Main Street.  It’s about time.

Detractors argue that the Rule, which forces banks to return to their role as basic depositor and lender, limits the banks’ ability to “make markets,” politician-speak for “bet the farm.”  This will negatively impact liquidity, making it harder for investment capital to reach those that seek it, they argue.  Blah blah blah.  And needless to say they find “friends” in Congress (read: recipients of donations) to beat the drum.  Well this time, the administration is not budging. Can you say, “Election year”?

Here’s the bottom line.  Banks have served two distinct functions this millennium, one as deposit holders and lenders, and one as investors.  The deposit-holding and lending function (the actual banking) serves Main Street.  The risky investments—or “market-making” if you listen to bank lobbyists—serve the bank executives at the risk of depositors.  The Volcker Rule allows banks to hedge risk but make no other investments.

Investing—for example, in incomprehensible derivatives that include AAA-rated, subprime mortgages not worth the ink in which they’re written—is not the role of a bank.  It is the role of separate institutions, which will certainly step up to fill the void.  And when they step in, they won’t be risking the deposits of unwitting taxpayers.

Dodd-Frank gives banks two years to comply with the Volcker Rule, and they’d better get changes underway.  The regulators are—knock on wood—finally serious and unified in their efforts.  Bankers beware.  Main Street, rejoice.

Assisted by David T. Martin

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Let’s look at some of the details of JPMorgan’s acquisition of Washington Mutual from the FDIC. Warning: these new details may not be safe for children.

JPMorgan’s Purchase and Assumption Agreement dated September 25, 2008, contains a SIX PAGE INDEMNIFICATION SECTION. Indemnification shifts the risk. Guess who the risk was shifted to? Yep, the good old FDIC. They agreed to indemnify JPMorgan against virtually all risk involved with the deal.

Click here to read the entire Purchase and Asset agreement. For example on page 24 the FDIC promises to insure JPMorgan against practically all liabilities resulting from any WAMU misconduct…even costs for attorney’s fees. And don’t think for a moment JP Morgan is ignoring those provisions. As investors clamor for justice, JPMorgan hides behind the FDIC’s FIRREA process  while asking for billions of additional funds under the indemnification agreements (click here for a recent WSJ article on the subject). Is it too much to ask for JPMorgan to take responsibility; to take the good with the bad? Instead they appear to be gaming the system.

Franklin Roosevelt stated,

The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it comes stronger than their democratic state itself

While Mr. Hochberg has claimed no “bad faith” he has not claimed “justice”. The WAMU stakeholder deserve justice, not a back alley deal designed to benefit one entity – JP Morgan – to to the detriment of all others.

Assisted by Zach Kady

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JPMorgan’s purchase of WAMU must be seen through the lens of the financial crisis of September, 2008. That’s the conclusion of official examiner, Joshua Hochberg.

The Deal

Dan Fitzpatrick at the Wall Street Journal (click here for the article) reports that the FDIC called JP Morgan with an offer to sell WAMU six days before it even received the failed bank. That’s a problem, did they call Wells Fargo or a small but robust regional bank, or what about a … a European giant (get the bidding going)? No JPMorgan’s  Chief Executive, James Dimon, got himself an exclusive. And what does he say: I’ll think about it; we “might be willing” to purchase WAMU. Wouldn’t want to play poker with this guy; no doubt he is brutal – beware the check raise. Three days later, JP Morgan – perhaps knowing it has an exclusive drives a hard bargain: it won’t buy WAMU whole, but would certainly purchase the bank out of receivership.

Now here’s the really outrageous part: over the following days, JPMorgan and the FDIC negotiated the terms of the WAMU purchase despite the FDIC’s claims to other banks that terms were non-negotiable. On September 26, 2008, JPMorgan purchased Washington Mutual’s $188 billion in deposits and a coast-to-coast presence from the FDIC for $1.8 billion AND SIX PAGES OF INDEMNIFICATION RIGHTS AGAINST FUTURE LIABILITIES AND LOSSES.

Official Examiner Joshua Hochberg has found no signs of dealing in bad faith. Come on Josh. 

Instead of handing WAMU over to JPMorgan on a silver platter, the FDIC should have run a real auction and forced JPMorgan to compete. Yes compete; against other banks in good faith. 

Tough to understand the FDIC’s decision – particularly from an agency with a good reputation and a cadre of very experienced and sophisticated staffers. 

This should not be swept under the rug. Investors, consumers and competitive banks deserve better.

Assisted by Zach Kady

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Sheila Blair and the FDIC are right. The banking industry must step up and take part in finding a solution to a problem that they were responsible for creating in the first place.

Struggling to stay afloat as the federal deposit insurance fund dwindles, The Federal Deposit Insurance Corporation (FDIC) issued a proposal yesterday requiring banks to prepay $45 billion in insurance premiums. FDIC Chairman Sheila Blair said it was time for the banking industry “to step up” and get involved in industry solutions.

The problem facing the FDIC is money; there simply is not enough of it. The FDIC has already closed 95 banks this year (compared to 25 total in 2008) and 416 more are classified at high risk of failure. The solution to increase reserves proposed yesterday would require banks to prepay their premiums for 2010-2012. This would generate money upfront and prevent FDIC funds from drying up. 

Critics of this pre-pay solution (largely led by the banks themselves) have offered two perilous alternatives:

The first alternative proposed by critics is to use taxpayer dollars by dipping into the FDIC’s credit line with the Treasury and borrowing from the government. Use taxpayer dollars??? Haven’t Main Street taxpayers’ bank accounts been damaged enough by Wall Street’s blunders? A solution that “fixes” the problem by penalizing Main Street is shameful and inexcusable.

The second alternative proposes that the FDIC borrow from the banks themselves. In effect, the FDIC would regulate the very banks that it is borrowing from. That scenario creates a dangerous conflict of interest. Banks will have one up on the regulators that owe them money. (Surely, you would take it easy on your lender.)

Sheila Blair and the FDIC are right. The banking industry must step up and take part in finding a solution to a problem that they were responsible for creating in the first place.

Assisted by Jess Begen and Zach Kady.

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