Editor’s note: We just added a petition urging regulators that we DO need a cop on the beat when it comes to regulating Wall Street. Add your name and share with your networks! New Petition
This morning, the Federal Reserve Board of New York President, William Dudley, testified to the Senate Committee on Banking, Housing & Urban Affairs.
The hearing was called after disturbing reports about bank regulator capture. You can see them here , here, here and here. One of the key takeaways from the hearing is that the American people have lost their faith that bank regulators are doing their job and protecting consumers and communities over the banks. This is due not only to the foreclosure crisis that erupted in 2007, but also to the many ongoing bank scandals, like LIBOR rigging, the $6 billion London Whale escapade, the BNP Paribas settlement, and others.
At one point, in response to a question from Senator Elizabeth Warren, NY Fed President William Dudley explained that he viewed his role more as a fireman than a “cop on the street.” So, if the New York Fed is the firefighter, then who is the cop on the street?
One of the issues that wasn’t discussed- but should have been-is the role that bank regulators like the NY Fed also play in approving bank mergers. When a bank prepares to merge or acquire other banks, it has to request permission from its bank regulator to do so. Bank regulators will then consider a few factors about the merger, such as:
- What are the additional risks created by this merger?
- Is there public benefit to this merger?
- Is the bank properly capitalized?
A bank merger that has been recently proposed in California is especially relevant to this conversation. When IndyMac Bank failed, it was purchased by a group of billionaire investors who renamed it OneWest, and secured a lucrative “shared loss” agreement from the FDIC.
Under this agreement, the FDIC agreed to help cover the cost of losses from a $13 billion portfolio of mortgages that IndyMac had originated. OneWest also agreed to modify mortgages when possible, using the FDIC’s mortgage modification program, and later the HAMP program.
Unfortunately, as CRC pointed out in an American Banker blog post earlier this week (Is the FDIC Subsidizing a ‘Too Big to Fail’ Merger?), OneWest’s foreclosure track record suggests that the bank did NOT modify mortgages where possible. Worse, outside of one 2011 audit, we still don’t know if the FDIC conducted any other audits of OneWest bank’s compliance with its obligation to modify mortgages where possible.
Fast forward to 2014, and OneWest bank is proposing to merge with CIT Group.
Does that name sound familiar? Talk about corporate welfare! CIT Group received $2.3 billion from the US taxpayers, via TARP. A little while later, CIT Group filed bankruptcy, and eliminated its obligation to repay the government. Yep, $2.3 billion in free money from Uncle Sam. How many homeowners might have been able to keep their homes if that money had gone to modifications instead?
Did we mention that the current CEO of CIT Group, John Thain, is the same John Thain that spent $1 million redecorating his office in the middle of the financial crisis? What’s it like to own a $35,000 commode?
Now, these two banks, with very troubled histories, are assuring the bank regulators that they are equipped to merge. You won’t find this in most of the financial media reporting on this merger, but one of the interesting aspect of this merger is that the leadership of the banks are both expecting the FDIC to allow OneWest to transfer the shared loss agreement to CIT Group, and that it will be continued at this new, Too Big To Fail bank. This apparently is key to the merger, as investors have asked the bank about it, and they’ve assured them it will continue.
Yes, you heard that right. The bank leadership is claiming it’s ready to take on the Systemically Important Financial Institution designation, but also holding out its other hand for an ongoing subsidy from the FDIC. Any contradictions there?
California communities, who are reeling from the thousands of foreclosures by OneWest bank, including on seniors and their surviving spouses (American Banker earlier this week: HECM Non-Borrowing Spouses Renew Class Certification Attempts) , are rightfully concerned about whether bank regulators will approve of this Too Big To Fail bank merger.
What YOU can do about it:
If you are one of those Californians, might we suggest you get in touch with your bank regulators and let them know about your concerns? CRC and our members are asking the Federal Reserve to hold hearings in Los Angeles about this merger, and you may also want to let your bank regulators know that you support the transparency and public dialogue about this proposed merger. They’d also likely be interested to hear if you’ve had any experiences with OneWest or its subsidiary, Freedom Financial.
If you’d like to learn more about this merger, a few resources we might suggest:
Can We Have Bank and Regulator Hearings in California Too? California Progress Report Op-Ed
Is the FDIC Subsidizing a ‘Too Big to Fail’ Merger? American Banker Op-Ed