Congressman Barney Frank today issued the following statement calling on federal and state officials to reconsider decisions to prosecute financial institutions for wrongdoing committed by smaller institutions which the larger institutions absorbed at the urging of federal officials during the financial crisis. A recent example is the decision by New York Attorney General Schneiderman along with members of the federal-state task force to take action against J.P. Morgan Chase for potentially criminal acts by Bear Stearns before it was acquired by J.P. Morgan Chase in March 2008.
Having been Chairman of the House Financial Services Committee at the time that this occurred, I know that J.P. Morgan Chase acted at the strong request of the Federal Reserve and the Secretary of the Treasury during the Bush administration. The Federal officials involved believed that the failure of Bear Stearns would have terribly negative consequences for the economy, and they urged J.P. Morgan Chase to do a good deed by taking over an institution which, I believe, the bank would never have sought to acquire absent that urging. The decision now to prosecute J.P. Morgan Chase because of activities undertaken by Bear Stearns before the takeover unfortunately fits the description of allowing no good deed to go unpunished.
This does not mean that there should be impunity for those in various financial institutions who misbehave, but the remedy should be to pursue those individuals rather than the institutions for which they worked, when the only thing that remains of the institution is the larger entity which absorbed the smaller one at the request of the federal government. I believe a similar rationale applies to Bank of America, which undertook a takeover of Merrill Lynch in part because federal official urged it to do so.
This does not mean that there should always be immunity. I am aware of no federal urging that led CEO Ken Lewis of Bank of America to take over Countrywide, and it is entirely appropriate for the bank to be pursued on that account. However, in those cases where larger financial institutions absorbed smaller ones at the request of Bush administration officials who understandably sought to minimize damage to the broader economy, it is inappropriate to punish those institutions for prior activities of the entities they absorbed.
To repeat, my request for reconsideration of these decisions applies only to those extraordinary cases in which top regulators pressed financial institutions to absorb smaller, troubled entities. I am not calling for any change in procedures by the FDIC or other front line regulators used in the normal course of liquidating failed institutions under its jurisdiction.