By refusing to close insolvent banks, the Obama administration is violating an important law, the “Prompt Corrective Action Law” [US Code, Title 12, Chapter 16, sec 1831]. That law, in particular, mandates explicitly to minimize the cost to the FDIC (hence the “prompt” closure of “undercapitalized” banks). The law defines in detail what “undercapitalization” means, and mandates the “appropriate Federal banking agencies” to find it out (because if a bank defaults, the FDIC is left holding the bag). They have a limit of ninety days. By the way, unrestricted bonuses are unlawful too, it is explicitly mentioned, and so on.

In other words Obama and Geithner have been debating the law, as if they had a choice. Geithner, in particular, because he has been in an oversight role forever, should be subject to prosecution, for having deliberately ignored and violated the law (having failed “to resolve the problems of insured depository institutions at the least possible long-term loss to the deposit insurance fund” in spite of “Prompt corrective action required”).

Now the Geithner plan is providing welfare for hedge funds, and their associated corrupt banks. Geithner calls that the PPIP. The PPIP works better, in its generic case with a positive outcome for the insolvent banks and greedy hedge funds, when the FDIC maximizes its losses. The PPIP also violates the ‘Prompt Corrective Action Law” (Sec. 1831), and its spirit.

The way it works is this: an agent can borrow from the FDIC, and then it can buy worthless assets with the funds it has borrowed. Next, it could then walk away, since the Geithner loan is “nonrecourse”. “Nonrecourse” means that if the agent defaults, no part of the loan can be recovered by seizing some collateral of the agent. The agent does not need any collateral. The agent can buy something for a billion dollars one day, and then walk out the next day, no question asked by anyone.

The agent can be anything: Geithner just has to like the agent (so it’s the Paulson plan in disguise, except the funds are much greater; the arbitrariness is the same, though: it’s all about the love and esteem that the Treasury Secretary has for the potential agent). The agent could be a corrupt, insolvent bank, or a greedy desperate hedge or a corrupt insolvent private equity fund (there are some of the later holding a lot of worthless real estate, such as one the columnist Thomas Friedman has invested in, explaining his constant, glowing propaganda for the Geithner plan). Then agents could exchange each others’ bids, and favors. It would be perfectly legal, as far as Geithner is concerned (not as far as the Constitution is concerned, because the equality clause would be violated).

Bill Moyers interviewed WILLIAM K. BLACK, Senior Regulator for the Savings and Loans crisis under Reagan and Bush Senior, a criminologist, law, economics and business professor [April 5, 2009].

WILLIAM K. BLACK: In the Savings and Loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the Savings and Loan crisis, didn’t matter which party was in power, the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, “You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead you’re covering up the bank losses, because you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn’t work. You will cause your recession to continue and continue.” And the Japanese call it the lost decade. That was the result. So, now we get in trouble, and what do we do? We adopt the Japanese approach of lying about the assets. And you know what? It’s working just as well as it did in Japan.

BILL MOYERS: “Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?”

WILLIAM K. BLACK, Senior Regulator for the Savings and Loans crisis: “Absolutely.”


WILLIAM K. BLACK: Absolutely, because they are scared to death. All right? They’re scared to death of a collapse. They’re afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we’ll run screaming to the exits. And we won’t rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it’s foolishness. All right? Now, it may be worse than that. You can impute more cynical motives.”

There is an easy way to prevent panic: in France all deposits are insured by the government, in any bank, whatever the amount. But this is not the way chosen by Summers and Geithner. Potential panic is thus just a pretext for them: the USA could do like France, and no panic would be imaginable. Now the cynical motives are in plain sight: Summers got eight million dollars, just like year, in 2008, from the very people he wants to give two trillion dollars to, in 2009. Maybe the adjective is venal, not cynical.

What does PPIP stands for? According to Geithner, Public Private Investment Plan. According to me, Public Pays for Impudent Plutocrats. Interestingly, the size of PPIP is supposed to blossom to two trillion dollars, the exact size of the hedge fund “industry”. Does that mean the hedge fund “industry” is broke too, and has to be fully recapitalized by taxpayers, lest the ultra rich would not be ultra rich anymore?

Patrice Ayme


Addendum: 747 banks were nationalized (“put in receivership”) during the S&L crisis (the average bank was kept in government custody for three to four months; bad assets were yanked out, and put in the RTC).

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