WASHINGTON Bad idea, horrible timing.
That, in essence, was the review Federal Deposit Insurance Corp. chairman Don Powell gave to proposed legislation aimed at fixing an obscure paperwork error made nearly a decade ago by the FDIC.
The fix, to an error the agency acknowledges, would require the FDIC to recalculate insurance premiums paid over several years by roughly 250 banks and refund overpayments. That could cost the thrift insurance fund $500 million at a time Mr. Powell says the fund is ill-equipped to handle it.
Indeed, he said, it could cost the Savings Association Insurance Fund as much as the failure of Superior Bank, which is expected to erode by at least 6 basis points the funds ratio of reserves to insured deposits.
No legitimate public policy purpose would be served by this proposal, Mr. Powell wrote in an Oct. 11 letter to Senate Banking Committee Chairman Paul Sarbanes. Passage of this amendment would weaken the deposit insurance system and dismantle carefully crafted legislation in a way that would unjustly enrich a limited number of institutions.
Mr. Powell followed up the letter with remarks blasting the so-called SunTrust amendment in a House subcommittee hearing Wednesday.
The issue involved is complex, but proponents have persuaded dozens of lawmakers to back the provision, which would amend the Federal Financial Institutions Reform, Recovery, and Enforcement Act of 1989 but could be attached to any bill moving through Congress.
The FDIC admitted last year that it had made a mistake on its assessment worksheets given to banks that had purchased thrift deposits in 1991 and 1992 under the Oakar amendment, which was passed during the savings and loan crisis. The agency paid back $9 million to 70 institutions that had overpaid during those years, and said that, because the mistakes were made in good faith, it would not collect any underpayments.
The FDIC claims that SunTrust Banks Inc. and other institutions, including Bank One Corp., that purchased thrifts during those years but were given the correct worksheets, are now asking Congress to let them make the same mistake that others made unwittingly.
You ask for change for a $10 bill, and I mistakenly give you change for a $20. Under the SunTrust amendment, I would be forced to make that mistake for all my friends and neighbors, too, Mr. Powell said in an interview Thursday. I dont know what is fair about that.
SunTrust and others dispute that analogy. They say the FDIC is spinning the story to preserve the thrift funds cash.
We think they are trying to cover up a mistake, said Raymond Fortin, SunTrusts general counsel. We can understand why they dont want money to go out of the fund. Im sure they are attached to the money. The basic issue is whether or not the FDIC followed the original Oakar statute. We dont think they did.
Proponents of the SunTrust amendment take issue both with the FDICs questioning of their motives and speculation about damage to the fund. The amendment would cap the cost at $50 million, proponents say, but Mr. Powell said such a cap might not stand up in court.
The amendments supporters argue that the FDIC has misinterpreted the Oakar provision, which allowed banks to purchase thrift deposits but forced them to maintain those accounts in the thrift fund. The statute also said that banks could not count runoff from those deposits until after an acquiring period.
SunTrust maintains that the FDIC interpreted that timeframe broadly to its own advantage.
That argument is gaining traction on Capitol Hill. Most recently, 10 senators, including two members of the Banking Committee Sen. Charles Schumer, D-N.Y., and Sen. Jim Bunning, R-Ky. signed an Oct. 5 letter supporting the amendment.
Sources said House Financial Services Committee Chairman Michael G. Oxley, R-Ohio, is seriously considering the amendment since Chicagos Bank One, which is among the institutions that would gain from the bill, is big in his home state. About 20 members of his committee signed a letter in May supporting the amendment.
But two prominent trade groups are taking the FDICs side.
It really is very bad public policy, said Kenneth A. Guenther, president of the Independent Community Bankers of America. This is an outright special-interest assault on the FDIC.
If they have such an excellent case, why havent they pursued it in the courts, instead of pursuing a special-interest law that enriches their own pockets? said Diane Casey, president of Americas Community Bankers. Its really a raid on the funds looking to enhance their own balance sheets.
Mr. Fortin said Congress should resolve the issue.
It is Congress that passed the Oakar legislation, he said, and all we are asking them basically to do is to restate their intent.