While proponents of government intervention liken the bailouts to pulling an inebriated friend out of water, it may be better compared to handing the keys of a Hummer to your inebriated friend after he already has had a few car crashes. Should we not have some sort of sobriety test and drivers’ training for banks before we let them get behind the wheel again? Should we even be giving them their license back? Respected banking policy analyst and attorney, Vern McKinley would argue that “part of the churning process of capitalism [is letting] institutions fail.”  

Having worked at the Board of Governors of the Federal Reserve System (Fed), the U.S. Department of Treasury’s Office of Thrift Supervision (OTS), Resolution Trust Corporation (RTC), Federal Deposit Insurance Corporation (FDIC), and as an expert advisor to central banks around the world, Mr. McKinley intimately understands economics and banks. In fact, in 1997 he sounded the alarm on Freddie Mac and Fannie Mae and likens their policies to homeownership on steroids.” He is now wrestling with the issue of open bank assistance. For his research and for ensuring better short and long term decisions, Mr. McKinley asked for meeting minutes from the September 29, 2008 Wachovia meeting and the Fed’s documents on Bear Stearns. He wanted records that would show the considerations about the outcomes of the institutions. What were the predictable outcomes of failure? What criterion was used? What would fallout specifically mean?

Big dog enterprises like Lehman, Merrill Lynch, AIG, and others quickly became front page stories with government meddling. In March 2008, infamous Bear Stearns was acquired by JP Morgan. In a short few weeks time, Bear saw its stock rapidly decline and the government urged against bankruptcy with fears of contagion. Once Bear had to start defending itself against rumors, it was already too late and the bank that had survived the Great Depression was looking at collapse. Similarly, in September 2008, Wachovia succumbed to the stress of the financial system and reaped the bad luck of some unsavory investment decisions. The bank known for its customer base allured many suitors. The Federal Deposit Insurance Corporation (FDIC) announced Citigroup’s engagement to Wachovia on September 29, 2008. In a telenovela twist, only a few days later Wachovia shunned Citigroup and took up with Wells Fargo. Through the flip flops, the FDIC went from refusing to provide any assistance on September 20, 2009 to offering all sorts of assistance just a week later.

While people have a general idea of the theory of contagion as justification for government intervention, McKinley notes that there is “no meat on the bones.” With blatant disregard for the law, the government refused to grant Mr. McKinley’s Freedom of Information Act (FOIA) requests. Upon appeal of his FDIC request, McKinley received a few pages in which there was really “no marginal value between a blanket refusal to disclose and the redacted version.”  

What Mr. McKinley encountered is a pervasive problem with getting information about financial regulatory actions. In free market economics, Adam Smith described an “invisible hand” dictating movement. With the current intervention economics, the hand is not invisible but rather belongs to the Fed, Treasury, and FDIC as part of a “patchwork regulatory system” and their records should be available to the public.

The public’s greatest tool for seeking public records, FOIA, has been obfuscated by gamesmanship at most public agencies involved with the financial programs. Part of the lack of transparency derives from administration leadership. Ironically, all the stimulus money going towards financial institutions has burdened and deprived other functions of government agencies. Nonetheless, government agencies still have adequate resources to reject transparency. Mr. McKinley was outnumbered on a conference call 3 to 1 with the agency’s “full army of attorneys.”  

Mr. McKinley took his fight to court and filed a lawsuit naming both the FDIC and the Fed for attempting to deny the public’s right to know the intervention details. While Mr. McKinley’s lawsuit forges new ground for the inquiries about the economy, it is not likely to be the last as Mr. McKinley points out there are “a thousand points of bailout” to further be investigated.

The government has not held itself accountable and has arbitrarily provided capital injections and then refused to provide the supporting information to the public as has been reported by TARP Special Inspector General Neil Barofsky. In doing so the government punishes the financial institutions that navigated safely through better investment decisions by forcing them to pay taxes to fund the bailout, pay higher deposit insurance premiums, and to compete against subsidized banks. In a word from banking expert McKinley this is simply “wrong.”

As Mr. McKinley pursues the information on “systemic importance,” his research will carry significant weight. Unlike the federal government, he will be looking at the long term ramifications of capital injections and deviations from capitalism. To get more information about Mr. McKinley’s work and lawsuit please visit his website.

Related Reading:

 McKinley's Radio Interview on Financial Crisis

Bright Lines and Bailouts: To Bail or Not To Bail, That is the Question