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Black vents particular ire at Geithner, who, as New York Fed chair, fiddled while Wall Street imploded; and Henry Paulson (and Geithner again), who, as Treasury secretaries, refused to enforce a key banking law, the Prompt Corrective Action (PCA) law. Congress passed it in the wake of the S&L scandal in 1991, and the first President Bush signed it. It's probably the best, fairest, and clearest piece of financial legislation since the New Deal.
Under the law, Federal Deposit Insurance Corporation (FDIC) examiners initially rate banks as "well capitalized," "adequately capitalized," "undercapitalized," "significantly undercapitalized," and "critically undercapitalized." The tags determine the examiners' actions, if any. Undercapitalized banks must build up their capital and get FDIC approval for acquisitions and opening new business lines. When a bank becomes significantly undercapitalized, a regulator can order serious sanctions, from firing management to restricting stock sales and forcing divestitures. Critically undercapitalized banks must be placed in receivership, unless the FDIC determines that some other action like a merger or sale would better protect the depositors. That's it in a nutshell — obviously, regulators were allowed to do a lot more, like forcing a change in accounting systems and blocking bonuses. Bottom line: PCA worked like a charm.
In the entrepreneurial Reagan-Bush era, the banking system had become a mess. Often, more than 100 banks failed annually, as has happened this year. After PCA, banks cleaned up and failures became rare — only a handful per year, and sometimes none. U.S. Treasury secretaries even pushed the PCA idea to Japan during its "lost decade."
But in the U.S., after George W. Bush's election in 2000, PCA began to wither from disuse, especially because of opposition from the megabanks and laissez-faire policy makers. Toward the end of the Clinton administration, Washington caved in to the financial lobby and passed new laws that promoted risk. Congress repealed the Depression-era Glass-Steagall Act, which had drawn a sharp line between commercial banks and investment banks. Another new law immunized securitizers from lawsuits even if their products were rubbish. A third new law allowed the wildest form of derivatives — "naked" credit default swaps, side bets on CDOs that could be placed by investors who didn't even own the bonds. The old prudent, conservative banking model gave way to the sleek megabank casino, which was fine with the Fed. Ben Bernanke, then a Fed regional governor, spoke in 2004 of the new "Great Moderation," which the industry took to signal a period of ultralax regulation.
The message from the Bush administration was clear: PCA "ceased to be applied to the big boys," says Camden Fine, president of the Independent Community Bankers of America. With his square jaw and plainspokenness, he calls to mind James Stewart in It's a Wonderful Life. Like Stewart's George Bailey, Fine is a small-town banker, though now he is the sole lobbyist for about 5,000 member banks around the United States. For more than 20 years, he ran the Mainstreet Bank on Main Street ("not Wall Street," he emphasizes) in Ashland, Mo., a town of 2,000. He had 11 employees. Like the members of his trade group, Fine isn't fond of Wall Street, or the "too-big-to-fail" banks — the "systemically important" megabanks that the taxpayers bailed out.
"The community banks didn't cause" this crisis, he points out. "This was Wall Street, the mortgage banks, and near-banks," by which he means the herd of largely unregulated nondepository institutions that extend credit. "Much of the regulated industry didn't have anything to do with this."
Fine says he can live with the PCA law and even endorses it, but he detests the fact that it was no longer being used for the megabanks. It makes him smolder. "Greenspan — banks couldn't get too big for him," Fine says. He recalls a 2004 battle in which the Fed wanted to remove all capital-reserve requirements from the big banks. Fortunately, the FDIC won that scrum. Otherwise, the megabanks' behavior could have been even riskier and more devastating than what occurred.
It was bad enough that, during that run-up to the crash, bank examiners who wanted to scrutinize the giants were intimidated. One told Fine that a bank's CEO had "a direct line into Washington, and it could destroy the examiner's career." In another incident that Fine says outraged him, an examiner who tried to sanction Wells Fargo had his decision reversed after the CEO visited the Office of the Comptroller of the Currency; the examiner was then transferred out of the bank's district.
Eventually, it became clear that "nothing was happening to the big banks, and everyone knew they were sliding south," Fine says. When four majors — Wachovia, National City, Bank of America, and Citigroup — became critically undercapitalized, Fine asked FDIC Chairwoman Sheila Bair why they weren't being subjected to the PCA law, which could have resulted in replacing their executives or even breaking them up.
Fine likes Bair, a Republican who has a populist streak of her own and whom he finds to be a candid, "hard-as-nails regulator." But he says she "basically gave a nonresponse": that there were complicated issues and that, perhaps, if she had a free hand, action would be taken. "She was very sympathetic," he says, but what he gathered was that there "was great resistance from the political community."