Section 23 A
Please watch this video of Senator Corker (R-TN) asking Ben Bernanke about Section 23 A and Regulation W exemptions which allows for bank holding companies to get the Fed’s approval to allocate capital (inclusive of depositors’ money) for purposes other than what is normal. You’ll hear Ben play down Sen. Corker’s concerns by saying thinks like…”we don’t grant those very often” and then again… “It’s not something that happens often.” and then… but if they do happen, there are “guarantees, protections, backstops, to make sure that the bank is not at risk of taking losses.” REALLY BEN!?! REALLY!?! You make it seem like there were so very few of these exemptions and that they are just typically some minor matter that is so protected that we should believe that there is minimal risk to depositors.
Please remember my post called The Ghosts of Glass-Steagall that I wrote on August 27, 2007 (before most anyone was talking about the sad demise of Glass-Steagall). Remember what Bernanke just said yesterday about it being something that rarely happens and how the Fed and FDIC make sure to protect us. Sure thing!! You betcha.
Then read my followup Haunted by Glass-Steagall that I wrote on November 1, 2007. At the time, I feared exactly what I think Sen. Corker was asking about…the risking of depositor money by bending rules that were meant to protect us, precisely at the time when the risk is greatest.
Click on these links to see how many of these type of requests were made and granted over the years. Evaluate them for yourself.
Prior to mid-2007, the transactions are pretty much what Ben explained… a few requests, often for banks you may not recognize and often for normal acquisition purposes.
2005 click here
But in 2007 as the crisis hit, things changed. The names from June on will look familiar… Wachovia, Citi, Bank of America, JPMorgan, Deutsche Bank, Barclays, Royal Bank of Scotland, Citi again. Do you believe that it was just coincidence that all these companies showed up at the same time? At the time, they and the Fed loved to tell everyone that the banks were “well capitalized” and we know that was not even close to being true.
Looking through 2008 and 2009, you see the requests begin looking more and more like 2005 and 2006. I guess you could look at that as some kind of proof that things are not so extreme. But it doesn’t change the fact of what happened during the crisis and it does not ensure that we won’t see the same pattern the next time we have a crisis.
The way it looks to me… Bernanke allowed banks representing about half of American deposits to put those funds at risk precisely when the system was at its most vulnerable. It’s one more example of the regulators and especially the Fed waiving key regulations and protections when they become relevant. Which takes me back to Senator Corker’s excellent question and Chairman Bernanke’s misleading explanation. Bernanke pretends that Section 23A and Regulation W exemptions are rarely given or represent some minor transaction paperwork. If you looked through the actual correspondence, is that your perception? Bernanke’s explanation may be true for more stable times but it was untrue for the scenario that Senator Corker was specifically asking about. Many people seem to be impressed by Bernanke’s creativity in his attempts to solve the crisis. I am more impressed by his ability to mislead and lie without any accountability and as per Senator Bunning’s awesome statement, the ability for Bernanke to apparently say what he feels is true and be totally wrong without any accountability or consequence.
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