Fed Needs to Stop Approving (Goofy) Bank Holding Companies

The recent vote by Federal Reserve Board Governor Elizabeth Duke opposing the application of GMAC LLC (GMA) to become a bank holding company deserves high praise. The only reason GMAC, CIT Group (CIT), American Express (AXP), Discover Financial (DFS), Goldman Sachs (GS), and Morgan Stanley (MS) decided to become bank holding companies was because that was the only goofy way former Secretary of the Treasury Henry Paulson figured non-bank firms could access TARP funds.

No CEO in their right mind would knowingly reorganize their company so it could be regulated by the Federal Reserve. Just what they needed – another regulator looking over their shoulder!

The Fed is digging a regulatory hole for itself that will prove embarrassing. Insurance companies, such as Genworth (GNW), Hartford Financial (HIG), Lincoln National (LNC), and Protective Life (PL), whose stocks and bonds have been hammered due to observed weakness in their balance sheets, are all acquiring banks and/or forming bank holding companies to access TARP funds.

In approving the Protective Life Corporation’s application to become a bank holding company by acquiring the Bank of Bonifay and its holding company, the Fed went overboard to help the FDIC because that Bank was operating under a cease and desist order and its capital was insufficient given its risk profile. Protective Life was downgraded by Standard & Poor's on January 15, 2009 the very date the Fed approved its holding company application. S&P stated:

…Protective Life maintains a relative risky investment portfolio with sizable exposure to commercial real estate and BBB and below-investment-grade fixed-income securities.

The Fed is simply not prepared to deal with the regulatory problems it is bringing on itself by approving these absurd combinations. Let’s hope Fed Governor Duke’s view on this matter gains traction.

Comments

[James Wilson]

If they stop allowing GOOFY bank holding companies how would JEB BUSH or KARL ROVE cash out like the did under the last bank failure with Daddy Bush ?

2009 Feb 09 06:58 AM

[kelm]

You raise a very interesting point. We are so distorting our markets and corporate structures with these ad hoc plans and actions that we are causing collateral damage that may ultimately be as bad or worse than the damage we're trying to fix or avoid. The day is fast approaching when we hear that surprise - all the TARP funds are gone. We keep hearing that there are $350 billion left but we've heard that for many weeks. If true, then they aren't being spent. More likely they are dwindling and we don't know where. It will indeed be embarrassing for the Fed and the administration when it comes to light the companies that have become bans ust to get a cut of he TARP action.

2009 Feb 09 11:14 AM

[thatguy57z]

GMAC MORTGAGE CO, should have never been allowed to become a bank holding company, because they never meet the fed regulation requirement's. they should have been allowed to file bankrupt's along with GM,because it would have not cost the taxes payers any money. so that way they could have learned something in life, you make bad dealing's so you learn from your mistakes and move on. We don't owe them a dam thing. And I'm sure there are some of you that think you do, I myself know that I don't..

2009 Feb 09 09:41 PM

[informedguy67]

Why does GM show $37 billion in Income Tax Expense for 2007 alone? Yeah, seriously allow them to fail instead of giving them back what they gave the gov't for 1 YEAR in taxes! Completely stupid idea. Besides them having around 250,000 employees who would be jobless. Here's ONE CONCEPT you take for granted, without GM there goes future corporate taxes and future taxes for 250,000 employees. Everyone believes the Government DESERVES these taxes, I have no clue why. It is more important to give a 1 year tax refund to a corporation to help it survive multiple years more, especially in this volatile economic environment where fear has gripped investments and downsizing.
Please thatguy57, think it though before you rant about not owing people anything. (They may have put much more money in the system than you, therefore they should be entitled to much MORE benefits than you, they are taxpayers to)

2009 Feb 10 01:21 AM

[betterinformedguy]

informedguy67 is apparently completely uninformed!
GM NEVER paid that much in taxes. It was a non-cash accounting charge for heaven's sake! How could you possibly think they would pay tax when they don't make any money and haven't made any in years....

see the GM financial statements and become better informed:
www.gm.com/corporate/i...


On Feb 10 01:21 AM informedguy67 wrote:

> Why does GM show $37 billion in Income Tax Expense for 2007 alone?
> Yeah, seriously allow them to fail instead of giving them back what
> they gave the gov't for 1 YEAR in taxes! Completely stupid idea.
> Besides them having around 250,000 employees who would be jobless.
> Here's ONE CONCEPT you take for granted, without GM there goes future
> corporate taxes and future taxes for 250,000 employees. Everyone
> believes the Government DESERVES these taxes, I have no clue why.
> It is more important to give a 1 year tax refund to a corporation
> to help it survive multiple years more, especially in this volatile
> economic environment where fear has gripped investments and downsizing.
>
> Please thatguy57, think it though before you rant about not owing
> people anything. (They may have put much more money in the system
> than you, therefore they should be entitled to much MORE benefits
> than you, they are taxpayers to)

2009 Feb 17 05:01 PM

[H.J. Huneycutt]

Great article. I've not been too fond of these movements of non-banks to position themselves for TARP funds, either.

2009 Apr 03 10:32 AM