When a government ask is an order
The 11 banks that deposited collectively $30 billion into First Republic Bank acted under duress
The uninsured $30 billion pumped into First Republic Bank by 11 of the nation’s largest banks did not happen by spontaneous combustion.
Secretary of Treasury Janet Yellen, acting in collaboration with the Federal Reserve and FDIC, called JP Morgan chief executive, Jamie Dimon, to discuss the injection. The two operated in tandem to call other banks to join the private bail-out. As reported in today’s Washington Post, “Federal officials held an additional phone call with CEOs and regulators on Thursday morning to confirm the details of the plan, and Yellen met in person with Dimon at the Treasury Department shortly before the measure was formally announced.”
Mirabile dictu. All the sophisticated large banks complied with alacrity in collectively placing $30 billion in uninsured deposits in a risky bank. Why? The 11 were not philanthropic institutions or charities. They were profit-making enterprises seeking to maximize return on investment for shareholders, simpliciter.
But they understood that the “ask” by their federal overseers was, sotto voce, “ask or else.” The “or else” would be the regulatory headaches they might confront if the “ask” was defied: Community Reinvestment Act review, denials of proposed mergers, acquisitions, or branch openings, enhanced audits, or other adverse regulatory action where the discretion of the banking regulators is limitless. Highly regulated entities, like banks, never want to get on the wrong side of their regulators with paramount influence over their profit and loss statements.
So the “ask” of the 11 banks from the Treasury, Fed, and FDIC was a de facto order which the federal agencies had no authority to give. It was lawlessness by other means and shielded from judicial review.
This alarming phenomenon is inherent in a Leviathan state in which the government’s limitless regulatory discretion hangs like a sword of Damocles over regulated entities. It makes them infinitely vulnerable to government “jawboning” to enable the government to accomplish de facto what it could not achieve de jure.
You can have a regulatory state or you can have the rule of law, but you cannot have both.
I'm no finance wizard but it strikes me that this could be a rather perilous moment for the whole economic house of cards. It's clear that 'stability' is what the banksters require to stay in the game. When people freak and begin to withdraw significant cash, and the banks don't have it because it's elsewhere earning shareholders interest, do the math. That's plenty of incentive without the authoritarian threat the writer suggests. Not saying the Feds aren't capable, just saying 'stability' is critical to keeping the game going and the big players all depend upon it.