United Western Bancorp Inc (fka UWBKQ)

[iPrelude]

http://www.wsj.com/articles/paul-kupiec-and-peter-wallison-the-fdics-bank-holding-company-heist-1419292997

" The FDIC’s Bank Holding Company Heist
Recapitalizing a failing subsidiary bank with the assets of the parent firm is contrary to law

By
Paul H. Kupiec And Peter J. Wallison
Dec. 22, 2014 7:03 p.m. ET

Limited liability of shareholders is a basic principle of corporate law. Shareholders can suffer the complete loss of their investment in a corporation, but creditors of the corporation cannot sue shareholders to recover what they may have lost in a corporate bankruptcy. Yet to “protect” against future financial crises, the Federal Deposit Insurance Corp. has proposed a new bank-resolution process that would upend this principle.

The 2010 Dodd-Frank financial law authorizes the Treasury secretary to seize control of failing “systemically important financial institutions” and turn them over to the FDIC for “orderly” liquidation. This was intended to be an alternative to bankruptcy which, following the 2008 Lehman Brothers bankruptcy, has been portrayed (erroneously) as a disorderly process.

But here’s the rub. The largest, systemically important banks in the U.S. are subsidiaries of still larger bank holding companies. The FDIC’s proposed new bank-resolution process would seize the property of these bank holding company shareholders and creditors to bail out the creditors of a failing subsidiary bank, which is not authorized under Dodd-Frank.

This idea has gained momentum among bank regulators since it was introduced late last year and is likely to be adopted by the FDIC in the near future. Never mind that the plan is at odds with the way corporate law applicable to banks has worked in the U.S. for many years. Or that, as designed, the plan could impose losses on a bank holding company far in excess of its equity investment in a failing bank.

Assume that a bank holding company has $600,000 in equity and $1 million in assets, which includes an investment of $500,000 in a subsidiary bank. If the bank suffers a $1 million loss, it will wipe out the holding company’s investment in the subsidiary bank. Although the loss would cause the subsidiary bank to fail, under limited shareholder liability the bank holding company would still have $100,000 in equity and $500,000 in assets.

Under the FDIC plan, however, the agency will seize all the remaining bank holding company assets and use them to recapitalize the failed bank. In effect, in order to protect the creditors of the bank, the shareholders of the bank holding company are wiped out.

This outcome is no different than if a court were to hold that the owner of shares in a bank is personally liable for its losses, something that has not been done in the U.S. since bank shareholders faced “double-liability,” which was eliminated by law in 1953.

This confiscatory plan for carrying out the FDIC’s Dodd-Frank authority has no legal basis. Title II of the law authorizes the Treasury secretary to seize a bank holding company only if the holding company is in danger of default. Yet regulators claim they have the power to compel a bank holding company to recapitalize a subsidiary bank even if doing so violates limited liability and renders the holding company insolvent.

Not only is there no authority anywhere in Dodd-Frank for the FDIC to seize the assets of a solvent bank holding company, there is also no authority to use those assets to recapitalize a failing subsidiary.

It is important for Congress to address this issue in its next session. If the FDIC were ever to use this plan for a failing bank, likely in the midst of a financial crisis, the shareholders and creditors of the bank holding company would surely sue to prevent the taking of their property without legal authority. Courts, looking at a settled provision of corporate law, would want to see some legal support for FDIC authority to take the bank holding company’s property. Finding none, it is likely the courts would stop what could be a necessary step to keep a large failing bank from causing a wider financial crisis.

All indications are that the FDIC will proceed with this proposal unless Congress intervenes. There are two possibilities. Congress can amend Dodd-Frank so that it explicitly authorizes this regulatory overreach—putting shareholders and creditors of bank holding companies on notice that they are at risk for the losses of subsidiary banks. Or it could simply make clear that taking the property of bank holding companies to save the creditors of a subsidiary bank is not permissible.

What is important, however, is that Congress act, one way or the other.

Mr. Kupiec, a resident scholar at the American Enterprise Institute, has held senior positions at the FDIC, IMF and Federal Reserve. Mr. Wallison, an AEI senior fellow, was general counsel of the Treasury in the Reagan administration."

{ http://www.wsj.com/articles/paul-kupiec-and-peter-wallison-the-fdics-bank-holding-company-heist-1419292997 }

This applies to UWBKQ JMHO, the following is also related

http://www.arnoldporter.com/resources/.../publications.cfm?action=advisory&id=1209



" The House of Representatives passed the Financial Institution Bankruptcy Act of 2014 (H.R. 5421) on December 1, 2014. The bill, if enacted, would add provisions to the U.S. Bankruptcy Code, including a new "subchapter V" of chapter 11, under which "covered financial institutions" would be eligible to be debtors in a chapter 11 bankruptcy case.

The House Report says that the bill seeks to implement a "transparent judicial process that allows for the reorganization, rather than the liquidation, of a large financial institution" as a "preferable resolution strategy because of, among other things, the benefits of due process."1

H.R. 5421 would "amend[] chapter 11 of the Bankruptcy Code to address better the unique challenges presented by the insolvency of a financial institution and better allow such an institution to be resolved through the bankruptcy process."2 It would allow "the … holding company that sits atop the financial firm's corporate structure to transfer its assets, including the equity in all of its operating subsidiaries, to a newly-formed bridge company over a single weekend. The debt, any remaining assets, and equity of the holding company will remain in the bankruptcy process and absorb the losses of the financial institution."3

H.R. 5421 would function as an alternative to the FDIC receivership proceedings under title II of the Dodd-Frank Act, although the House bill does not expressly repeal title II of Dodd-Frank.4 H.R. 5421 would use a "single point of entry" approach that is similar to an FDIC receivership. "Single point of entry" refers to placing only the parent or holding company, and not its various subsidiaries, into bankruptcy.5 "