The Kanjorski Amendment Trojan Horse and Prompt Corrective Action
By Edward Harrison
Naked Capitalism
Two weeks ago as the Financial Reform Bill was wending its way through Congress, Paul Kanjorski emerged as the champion of breaking up too-big-to-fail financial institutions. After seeing trillions of dollars in taxpayer money go to backstopping, propping up and guaranteeing the liabilities of weak financial institutions, It looked like we were going to see some draconian action.
On Nov 11th, the Wall Street Journal reported:
"Rep. Paul Kanjorski (D., Pa.), a top lawmaker on the House Financial Services Committee, plans to offer an amendment to the bank-regulation bill currently before Congress that would allow the government to take preemptive steps limiting the size, complexity or risk of any financial company. Officials could intervene if specific conditions are met that signal a company poses a threat to the economy.
"'I see it as one of our potentially last chances to get control, particularly of financial institutions in their mega-forms, before they take over the world,' Rep. Kanjorski said. 'It’s a natural drive of capitalism to escape control and escape regulation and to keep growing to any size.'"
The Congressman got his way and the Kanjorski Amendment to the the Financial Stability Improvement Act passed late last week with a vote of 38-29. Congressman Kanjorski was satisfied with the result. After the vote, he opined:
"Looking forward, we have the capabilities to try to act in a preventative manner for the sake of every American and our economy. Most of us yearn for the day when the phrase ‘too big to fail’ is no longer a part of our vocabulary. Through responsible action advocated in this amendment, we can make that a reality."
But, wait one minute. Is this really the holy grail of financial stability and improvement? Of course it isn’t. In fact, it makes things worse. On page 7 of the Kanjorski Amendment, there is an enormous loophole that virtually eliminates the ability of regulators to take prompt corrective action in seizing and shutting down a bankrupt financial institution.
Here’s what the bill actually says:
(h) JUDICIAL REVIEW.—For any plan required under this section, a financial company subject to stricter prudential standards may, not later than 30 days after receipt of the Council’s notice under subsection (e)(5), bring an action in the United States district court for the judicial district in which the home office of such company is located, or in the United States District Court for the District of Columbia, for an order requiring that the requirement for a mitigatory action be rescinded. Judicial review under this section shall be limited to the imposition of a mitigatory action. In reviewing the Council’s imposition of a mitigatory action, the court shall rescind or dismiss only those mitigatory actions it finds to be imposed in an arbitrary and capricious manner.
Translation: we the bankrupt financial institution can sue in court to stop our being shut down by regulators. Hello litigation. Bye bye, prompt corrective action.
This is a Trojan horse.
That is huge because it means a weak bank can carry on in zombie form indefinitely, acting like a cancer to the whole banking system while the process makes its way through our court system.
Click here for Kanjorski Amendment Nov 2009
Source: Naked Capitalism
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