Hugh Wood
January 19, 2009

Five Months after US Treasury Sec. Paulson asked for TARP Funds (and at this writing not having used not a dime to buy toxic assets), he now proposes yet another solution – A new US Government Owned “Aggregator Bank.” [1] While this idea comes not from the RTC but from the Swedish Banking Crisis of 1990-1993, it has the potential to go far afield of its stated purpose.

Sweden’s bank crisis began with Swedish bank deregulation in the late 1980s. Deregulation rapidly eased credit. Easy credit allowed intensive investment in Swedish real estate. Like our (US) recent housing bubble, Swedish real estate prices soared in the late 1980s. As easy credit pushed prices higher Swedish banks loaned more krona against quickly appreciating hard Swedish real estate assets. When the Swedish real estate market collapsed the asset “values” deflated quickly. Swedish borrowers and their creditors, the Swedish banks, found themselves suddenly illiquid. [2] Does this sound vaguely familiar?

Sweden eventually mopped up the mess, but it cost them 2% of their entire GNP for a number of years. One of the RTC similar vehicles Sweden used in its bank/credit disaster cleanup was a toxic asset holding bank called Securum. “Securum was the Swedish state company founded in 1992 during the financial crisis in Sweden 1990-1994 for the purpose of taking on and unwinding bad debts from the partly state-owned Nordbanken bank.” [3] Securum, like the former (now dissolved) RTC, completed it assignment and was dissolved in 1997. [4]

Sec. Paulson, and soon to be Treasury Sec. Tim Geithner, New York Federal Reserve Chairman, now propose we create a US version of Securum – the new US Aggregator Bank.

This may work. My fear is that, given our unique US History in banking, our new US “Aggregator Bank,” will never be “dissolved.”

The First Bank of the United States Charter expired during political infighting in James Madison’s administration. Madison revived it as the Second Bank of the United States. President Andrew Jackson killed the Second Bank of the United States by Veto in 1832. [5].

We were free of a centralized banking system until the Panic of 1907 brought us the semi public/private Federal Reserve Banking System in 1913. The Federal Reserve (the de facto Third Bank of the United States) is not a true government entity and is not under the complete “control” of the United States Government. “Reserve Banks, as privately owned entities, receive no appropriated funds from Congress,” Lewis v. United States, 680 F.2d 1239 (1982).

Examining the organization and function of the Federal Reserve Banks, and applying the relevant factors, we conclude that the Reserve Banks are not federal instrumentalities for purposes of the FTCA, but are independent, privately owned and locally controlled corporations. [ & & &] Each Federal Reserve Bank is a separate corporation owned by commercial banks in its region. The stockholding commercial banks elect two thirds of each Bank’s. Id.

None of this (not a government entity) would be true for the new “Aggregator Bank,” It would be 100% owned by the Federal Government. Its initial purpose would be as a dump to process toxic assets, but at some point and at some day in the future it will have completed its toxic clean up function.

Then what will happen to this new Bank?

Consider: Here is this baby Bank — This 100% owned “Bank,” created for the Executive Branch, funded by Congress, to do with it as they see fit. [6]

If the Federal Reserve does not truly fit as a square peg into the round hole of being the “Third United States Bank” then this 100 percent owned entity could easily become the Third Bank of the United States.

  • A d v e r t i s e m e n t
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No one will recognize it as the Third United States Bank at its birth, because it is being born into a toxic cesspool.

But when the cesspool of toxic assets clears, will it be dissolved? Probably not.

The RTC concluded, but it was not a US 100% owned “Bank.”

No amount of “sunset,” language in its Charter will overcome the allure and economic drug addiction of granting the Executive Branch, funded by a willing Congress, its own (wholly owned) banking Toy. Am I deluded? Perhaps. However, this risk of giving the Executive Bank it own 100% owned banking Toy is so great that it is a risk worth discussing publically in this current, “worst economic crisis since the Great Depression.” [7]

Should I be skeptical? Secretary Paulson told us in September of 2008 he needed 700bn dollars to clean up toxic assets. Did he clean up any toxic assets? No. He bought stock in failing US Banks. Did those banks clean up any toxic assets? No. Has the Secretary purchased any toxic assets? No. The Secretary has not purchased a dime of toxic assets. Yet, we are on the hook for 350bn of the first half of TARP.

While murky, Treasury now proposes to use the second half of TAPP to purchase toxic assets. How? In a shiny new government owned bank.

When we fronted Sec. Paulson 700bn, no new bank was discussed. Now, we urgently need a 100% government owned bank for toxic assets.

Perhaps I am misinformed.

Perhaps I have not read the proper government pamphlets.

But, let me say that as I walk around and look at this shiny new “Aggregator” Bank and kick it Aggregator tires, I get the uneasy feeling in my stomach that I am, in fact, looking at the new unrevealed Third Bank of the United States.

Hoping that I am wrong and Treasury is not foisting a Trojan Horse Bank on the Public, I leave you with the words of President Andrew Jackson in his veto of the Second Bank of the United States.

The bill " to modify and continue " the act entitled "An act to incorporate the subscribers to the Bank of the United States " was presented to me on the 4th July instant. Having considered it with that solemn regard to the principles of the Constitution which the day was calculated to inspire, and come to the conclusion that it ought not to become a law, I herewith return it to the Senate [Vetoed], in which it originated, with my objections. President Jackson’s Veto Message Regarding the Bank of the United States; July 10, 1832. [8]


[1] U.S. ‘Bad Bank’ Plan Gets Momentum to Revive Lending, By Robert Schmidt and Craig Torres
Jan. 16 (Bloomberg) – “Renewed questions about U.S. banks’ viability are pushing regulators toward a new plan that would remove toxic assets from bank balance sheets, in what may become the biggest effort yet to unfreeze lending.
President-elect Barack Obama’s advisers see an increasingly grave banking crisis and are considering proposals far more sweeping than any steps that have been taken so far, according to people who’ve discussed the outlook with them.
"They need to do something dramatic," said Harvard University Professor Kenneth Rogoff, a former chief economist at the International Monetary Fund, and member of the Group of Thirty counselors on financial matters, a panel that includes Treasury Secretary-designate Timothy Geithner and Lawrence Summers, incoming director of the National Economic Council.
Officials at the Federal Reserve and other agencies are focusing on the option of setting up a so-called bad bank that would acquire hundreds of billions of dollars of troubled securities now held by lenders. That may allow banks to reduce write-offs, free up capital and begin to increase lending. Paul Miller, a bank analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia, estimates that financial institutions need as much as $1.2 trillion in new aid.
Other steps that may be under consideration include providing further guarantees for toxic assets that remain on the banks’ books, as officials did for Citigroup Inc. in November and with a $118 billion backstop for Bank of America Corp. today, or purchasing selected investments. Federal Deposit Insurance Corp. Chairman Sheila Bair yesterday played down the alternative of nationalizing lenders.”

See also,
Obama team weighs government bank to ease crisis. By Tim Ahmann
WASHINGTON (Reuters) – “The incoming Obama administration is considering setting up a government-run bank to acquire bad assets clogging the financial system, a person familiar with the Obama team’s thinking said on Saturday.
The U.S. Federal Reserve, Treasury and Federal Deposit Insurance Corp have been in talks about ways to ease a banking crisis that is once again deepening — and a government-run "aggregator bank" is among the options.
Outgoing Treasury Secretary Henry Paulson and FDIC Chairman Sheila Bair both said on Friday a government bank was one of a number of ideas U.S. regulators had been discussing.
The source said advisers to President-elect Barack Obama, who takes office on Tuesday, were also considering the idea of an aggregator bank among a range of options that could be pursued.”

[2] It may have been (also) the European Exchange Rate Mechanism [ERM] that came into effect in 1992 that has some significant effect on the collapse.

[3] Wiki.

[4] England, Peter, The Swedish Banking Crisis its Roots and Consequences, Oxford Review of Economic Policy (1999), Vol. 15, No. 3, at 94.

[5] President Jackson’s Veto Message Regarding the Bank of the United States; July 10, 1832; The Avalon Project of the Yale Law School.

[6] We know Congress has the “power” to create a wholly government owned US Bank. McCulloch v. Maryland, 17 U.S. 316 (1819), 17 U.S. (4 Wheat.) 316; 4 L. Ed. 579; (1819). “Although, among the enumerated powers of government, we do not find the word "bank" or "incorporation," we find the great powers, to lay and collect taxes; to borrow money; to regulate commerce; to declare and conduct a war; and to raise and support armies and navies. . . . But it may with great reason be contended, that a government, entrusted with such ample powers . . . must also be entrusted with ample means for their execution. The power being given, it is the interest of the nation to facilitate its execution. . . .”

[7] “You know, we are at a defining moment in our history. Our nation is involved in two wars, and we are going through the worst financial crisis since the Great Depression.” Barak Obama, Presidential Debate, University of Mississippi, September 26, 2008.

[8] President Jackson’s Veto Message, Op. Cit.

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