National City Highlights the Fed’s Doctrine

The most interesting exchange in National City’s (NCC) conference call revealed that the Federal Reserve does not allow banks to disclose any details of regulatory scrutiny. Banks cannot even disclose if the Fed is concerned or coercing them to “raise capital or be acquired.” The Fed is apparently more concerned with the systemic risk of a run on the bank, than protecting large depositors.

Former Fed Chairman Greenspan testified many times before Congress against raising the $100,000 FDIC deposit insurance limit. He said most accounts are under the limit and we must retain the moral hazard. A moral hazard without timely information on risk actually induces a run on the bank. National City admitted that businesses were reducing their commercial accounts based on rumors.

I wrote about the Fed being purposely ambiguous in "Conspiracy to Kill Bear Stearns?" The New York Fed granted Bear Stearns (BSC) a liquidity loan for up to 28 days, and then withdrew it after the market closed. The Fed let Bear announce the loan to placate the market, knowing how it would be viewed. Bear acted as the Fed’s conduit to deceive the public. Consumers and investors would have been better protected by not allowing Bear to trade on Friday, March 14. Here again the Fed was more concerned about systemic risk then protecting consumers and investors.

The Fed had blocked the SEC and the New York Stock Exchange from properly preventing Bear from trading that Friday. The lesson for National City’s commercial customers is clear: The Fed provides no warning of trouble. Large depositors were right to start a minor run on the bank.

Disclosure: Author is long BSC and NCC