GW Law Faculty Publications & Other Works Faculty Scholarship

2020

The FDIC Should Not Allow Commercial Firms to Acquire Industrial

Arthur E. Wilmarth Jr. George Washington University Law School, [email protected]

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Recommended Citation 39 Banking & Policy Report No. 5 (May 2020), at 1-17

This Article is brought to you for free and open access by the Faculty Scholarship at Scholarly Commons. It has been accepted for inclusion in GW Law Faculty Publications & Other Works by an authorized administrator of Scholarly Commons. For more information, please contact [email protected]. The FDIC Should Not Allow Commercial Firms to Acquire Industrial Banks

By Arthur E. Wilmarth, Jr.

Introduction The FDIC’s issuance of the Proposed ILC Rule and the FDIC’s approvals of Square’s and Nelnet’s On March 17, 2020, the Federal Deposit Insurance applications represent a fundamental change in policy. Corporation (FDIC) issued a notice of proposed Those actions effectively reverse the FDIC’s previous rulemaking, entitled “Parent Companies of Industrial policy of barring acquisitions of ILCs by commercial Banks and Industrial Loan Companies.”1 The FDIC’s firms. The FDIC imposed an 18-month moratorium proposed rule (the “Proposed ILC Rule”) would on acquisitions of ILCs by commercial firms between apply to FDIC-insured industrial banks and industrial July 2006 and January 2008. The Dodd–Frank Wall loan companies (hereinafter collectively referred to as Street Reform and Consumer Protection Act (Dodd– “ILCs”) that are controlled by “Covered Companies.” Frank Act) placed a three-year moratorium on such Parent companies of ILCs would be treated as “Covered acquisitions between July 2010 and July 2013. The Companies” if they are not subject to consolidated FDIC did not allow any firms engaged in nonfinan- supervision by the Board (Fed). The cial (commercial) activities to acquire ILCs from the Proposed ILC Rule would establish terms and con- imposition of its moratorium in July 2006 until the ditions governing applications for deposit insurance, agency approved Square’s and Nelnet’s applications in changes in control, and mergers involving such ILCs.2 March 2020.4 The Proposed ILC Rule would not restrict the permis- sible activities of Covered Companies and their non- Several applications seeking deposit insurance for subsidiaries. commercially-owned ILCs are currently pending before the FDIC.5 Rakuten recently announced that it was If adopted, the Proposed ILC Rule would open the temporarily withdrawing its application “to incorporate door to widespread acquisitions of ILCs by nonfinancial feedback from the FDIC.” At the same time, Rakuten firms engaged in industrial, retail, information technol- stated that it “will continue to work constructively with ogy, and other types of commercial activities (hereinaf- the FDIC and the State of Utah to move forward with ter collectively referred to as “commercial firms”). The our applications.”6 Rakuten is a large Japanese company likelihood that many commercial firms would acquire involved in e-commerce, information technology, and ILCs is indicated by the FDIC’s approval, on March 18, other commercial activities. Rakuten’s global website 2020, of deposit insurance applications filed by ILCs says that Rakuten “has grown to encompass over 70 owned by Square and Nelnet. Square and Nelnet would businesses across e-commerce, digital content, commu- not qualify for status as Fed-supervised bank holding nications and fintech,” ranging from “new open plat- companies under the Act forms for e-commerce, to experiments with drones, (BHC Act) because they engage in both financial and chatbots, deep learning and AI.” Rakuten’s website also nonfinancial activities.3 declares that “we challenge the status quo” and “embrace new and disruptive ideas.”7

Professor of Law, George Washington University Law School. Rakuten has been called the “the Amazon.com of Unless otherwise indicated, this article includes developments Japan.” If the FDIC approves Rakuten’s application, through April 15, 2020. that approval would encourage many other information

Volume 39 • Number 5 • May 2020 Banking & Financial Services Policy Report • 1 technology firms and e-commerce firms to pursue Analysis opportunities to acquire ILCs.8 1. Further acquisitions of ILCs by commercial If adopted, the Proposed ILC Rule would be con- firms would undermine the policy of trary to the public interest and unlawful for the follow- separating banking and commerce, threaten ing reasons: to inflict large losses on the federal “safety net” for financial institutions, and pose grave (1) Further acquisitions of ILCs by commercial firms dangers to the stability of our financial system would (a) undermine Congress’s longstanding and the health of our economy. policy of separating banking and commerce, (b) threaten to inflict large losses on the federal “safety a. Adopting the Proposed ILC Rule would net” for financial institutions during future systemic undermine Congress’s longstanding policy of crises, and (c) pose grave dangers to the stability of separating banking and commerce. our financial system and the health of our economy. The BHC Act generally prohibits commercial firms (2) Further acquisitions of ILCs by commercial firms from acquiring or exercising control over FDIC-insured would create toxic conflicts of interest and would banks, in accordance with Congress’s longstanding pol- also pose serious threats to competition and con- icy of separating banking and commerce.9 Under 12 sumer welfare. U.S.C. 1841(c)(2)(H), which was enacted in 1987, ILCs (3) The FDIC’s limited supervisory powers over par- are exempted from the definition of “bank” for pur- ent companies and other affiliates of ILCs are poses of the BHC Act if they do not accept demand plainly inadequate to prevent the systemic risks, (checking) deposits from for-profit business firms. ILCs conflicts of interest, and threats to competition and are FDIC-insured depository institutions, and they are consumer welfare created by commercially-owned currently chartered and regulated by five states. Of the ILCs. 25 existing ILCs (including Square and Nelnet), 16 are (4) Adoption of the Proposed ILC Rule would be chartered by Utah and four are chartered by Nevada.10 contrary to the public interest factors specified in the Federal Deposit Insurance Act and would also When the ILC exemption was adopted in 1987, violate the Administrative Procedure Act (APA). ILCs were small, locally-focused institutions that offered deposit and credit services to lower- and middle-income The following analysis explains why adopting the consumers. ILCs were first organized in the early 1900s Proposed ILC Rule would be contrary to the public as small loan companies that provided credit to indus- interest and unlawful. Moreover, the FDIC should not trial workers. ILCs did not become generally eligible adopt the Proposed ILC Rule while our nation is preoc- for federal deposit insurance until 1982. The total assets cupied with the challenges of responding to the global of ILCs in 1987 were only $4.2 billion, and the largest COVID-19 pandemic. The FDIC should withdraw the ILC had less than $420 million of assets. In 1992, U.S. Proposed ILC Rule or postpone any further action on banks and trust companies held total assets of $3.5 tril- the Rule, until (1) the enormous problems caused by lion—500 times the size of the $7 billion of total assets the pandemic have been successfully resolved, and (2) held by ILCs. A 1993 report from the Congressional as required by the APA, the FDIC has completed the Research Service (CRS) confirmed that ILCs played following actions: (a) explaining the factual, legal, and only a “minor” role in the U.S. financial system.11 policy basis for the FDIC’s decision to change its policy on acquisitions of ILCs by commercial firms, and (b) In July 2005, Walmart, the largest U.S. retailer, applied providing public notice of that explanation and afford- to acquire (and obtain deposit insurance for) a Utah ing the public a reasonable opportunity to submit com- ILC. Walmart’s application triggered widespread pub- ments on the FDIC’s change in policy and the agency’s lic opposition and led to an extensive debate about stated reasons for making that change. The FDIC should the desirability of allowing large commercial firms to not approve any additional acquisitions of ILCs by com- acquire ILCs. During one of the FDIC’s public hearings mercial firms until all of the foregoing actions have been on Walmart’s application in April 2006, Senator Jake completed. Garn (R-UT)—the sponsor of the 1987 exemption for

2 • Banking & Financial Services Policy Report Volume 39 • Number 5 • May 2020 ILCs—stated that “it was never my intent, as the author purposes of the BHC Act. However, CEBA’s legislative of this particular section, that any of these industrial history did not include any explanation of the purpose banks be involved in retail [commercial] operations.”12 or anticipated scope of Senator Garn’s exemption.17

In response to the vigorous public attacks on The Senate committee report on CEBA declared Walmart’s application, the FDIC imposed a six-month that “[n]onbank banks undermine the principle of sep- moratorium on acquisitions of ILCs by commercial arating banking and commerce, a policy that has long firms in July 2006. In its moratorium notice, the FDIC been the keystone of our banking system. . . . The sep- observed that the “evolution” of the “ILC industry” was aration of banking from commerce helps ensure that occurring “in ways that may not have been anticipated banks allocate credit impartially, and without conflicts at the time [Senator Garn’s exemption] was enacted in of interest.” The Senate committee report also explained 1987.”13 In January 2007, the FDIC extended its mor- that CEBA would close the nonbank bank loophole to atorium for an additional year. In the FDIC’s mora- “minimize the concentration of financial and economic torium extension notice, the agency pointed out that resources” and enhance “the safety and soundness of our “business plans” for ILCs owned by commercial firms financial system.”18 During the floor debates on CEBA, “differ substantially from the consumer lending focus of “members of Congress emphasized that the nonbank the original industrial banks.”14 bank loophole must be closed in order to preserve the general policy of separating banking and commerce and Walmart withdrew its ILC application in March to ensure parity of regulatory treatment for all compa- 2007, due to the FDIC’s extended moratorium and the nies that controlled FDIC-insured banks.”19 intense public hostility toward Walmart’s application. The magnitude of the outcry against Walmart’s pro- It is highly unlikely that Congress intended that posed ILC—which included statements of opposition CEBA would reaffirm and strengthen the policy of sep- from many members of Congress—supported Senator arating banking and commerce by closing the non- Garn’s view that Walmart’s application went far beyond bank bank loophole, but would undermine and weaken the intended scope of the exemption he sponsored in the same policy by adopting Senator Garn’s exemption 1987.15 for ILCs. The implausibility of such a self-contradicting purpose is heightened by the absence of any evidence Notwithstanding Walmart’s decisive defeat, the indicating that Congress expected that Senator Garn’s Proposed ILC Rule states that “the industrial bank exemption could be used to break down the barrier exemption in the [BHC Act] . . . provides an avenue between banking and commerce. In 1999—12 years for commercial firms to own or control a bank.”16 after CEBA—Congress again reinforced the policy of However, there is no evidence indicating that Congress separating banking and commerce by passing a statute either intended or expected in 1987 that Senator Garn’s that prohibited further acquisitions of FDIC-insured exemption would lead to acquisitions of ILCs by com- savings associations (thrifts) by commercial firms. In mercial firms. view of Congress’s powerful expressions of support for the policy of separating banking and commerce in both Senator Garn’s exemption was enacted as part of the CEBA and the 1999 statute, the unexplained text of Competitive Equality Banking Act of 1987 (CEBA). Senator Garn’s exemption should not be applied in a CEBA reaffirmed and strengthened Congress’s policy of way that undermines that policy.20 separating banking and commerce by closing the “non- bank bank loophole.” During the 1980s, many commer- Accordingly, the FDIC’s policy toward ILCs should cial firms used the nonbank bank loophole to acquire remain consistent with Congress’s strongly articulated FDIC-insured banks that either did not accept demand purpose of separating banking and commerce. The (checking) deposits or did not make commercial loans. appropriate policy for the FDIC would be to allow CEBA closed that loophole by expanding the definition acquisitions of ILCs by companies engaged in finan- of “bank” in the BHC Act to include all “banks” that cial activities but not by firms engaged in commercial accepted FDIC-insured deposits. Senator Garn’s exemp- activities. As shown in Part 4 below, the appropriate tion excluded ILCs from the definition of “bank” for policy is also supported by the public interest factors

Volume 39 • Number 5 • May 2020 Banking & Financial Services Policy Report • 3 that the FDIC must consider under the Federal Deposit have frequently failed in the past, due to problems such Insurance Act when the FDIC reviews applications as reckless lending, inadequate capital, and insufficient for deposit insurance, changes in control, and mergers liquidity. Thirteen ILCs failed between 1982 and 1984. involving ILCs. Two ILCs that were heavily engaged in subprime lend- ing (Pacific Thrift and Loan and Southern Pacific Bank) The FDIC followed the appropriate policy when it failed in 1999 and 2003. Those two failures inflicted did not approve Walmart’s application, imposed a mora- significant losses on the Deposit Insurance Fund. The torium on acquisitions of ILCs by commercial firms in number of ILCs declined from 58 to 23 between the June 2006, and extended that moratorium for another beginning of the financial crisis in 2007 and the end of year in January 2007. The FDIC cited many of the risks 2019, and the total assets of ILCs dropped from $177 and policy concerns described in this article when it billion to $141 billion.24 adopted and extended its moratorium.21 The Proposed ILC Rule greatly understates the risks The FDIC also followed the appropriate policy when posed by ILCs and their parent companies during a it issued its CapitalSource order in June 2008. The FDIC systemic crisis. The Proposed ILC Rule says that “the permitted CapitalSource’s parent companies to engage FDIC’s supervisory approach with respect to industrial “only in financial activities,” and the FDIC required banks was effective” because “[o]nly two small industrial those companies to divest any “non-conforming invest- banks failed during the [financial] crisis” of 2007–09.25 ments” within one year.22 The CapitalSource order was The Proposed ILC Rule does not refer to any problems the FDIC’s last approval of deposit insurance for an ILC that occurred at corporate owners of ILCs during that until it granted the Square and Nelnet applications. crisis.

In 2016, the federal banking agencies submitted In fact, as described below, several large corporate a joint report to Congress and the Financial Stability owners of ILCs failed or were rescued by the federal Oversight Council (FSOC). The 2016 joint report government during the financial crisis. In some cases, evaluated the risks of bank activities and affiliations, as the problems that threatened the survival of those cor- required by Section 620 of the Dodd–Frank Act. The porate owners were directly related to their ILCs. Four Fed recommended that Congress should prohibit own- very large corporate owners of ILCs— ership of ILCs by commercial firms, based on many of Acceptance Corp. (GMAC), Lynch, Goldman the same risks and policy concerns cited by the FDIC Sachs, and Morgan Stanley—received huge when it adopted and extended its moratorium. The from the federal government to prevent their failures. FDIC did not endorse the Fed’s recommendation in A fifth major ILC owner—GE Capital—encoun- the 2016 joint report, but the FDIC did not object to tered very serious liquidity problems during the crisis the Fed’s recommendation and did not challenge the and received extensive financial assistance from federal Fed’s analysis of the risks and policy concerns created agencies. A sixth corporate ILC owner—CIT Group— by commercially-owned ILCs.23 As discussed in Part 4 failed in 2009, thereby wiping out $2.3 billion of tax- below, the Proposed ILC Rule does not explain why payer-funded assistance that CIT received from the the FDIC has decided to change its policy and now federal government’s Troubled Asset Relief Program intends to permit acquisitions of ILCs by commercial (TARP). A seventh corporate ILC owner—Fremont firms, despite the risks and policy concerns the FDIC General—collapsed in 2008, after suffering large losses identified in 2006 and 2007. related to the subprime mortgage lending activities of its ILC (Fremont Investment and Loan). b. Further acquisitions of ILCs by commercial firms would be likely to inflict large losses on Thus, as the Fed correctly pointed out in the 2016 the federal “safety net” for financial institutions joint report to Congress and FSOC, “companies that during future systemic crises. failed or required assistance at the outset of the 2008 In view of the serious potential dangers posed by financial crisis included a number of companies that commercially-owned ILCs, the FDIC should not allow owned and controlled ILCs.” In the same report, the further acquisitions of ILCs by commercial firms. ILCs FDIC acknowledged that some “parent companies or

4 • Banking & Financial Services Policy Report Volume 39 • Number 5 • May 2020 affiliates [of ILCs] failed or experienced severe stress” the financial crisis. A week after Lehman Brothers failed, during the financial crisis.26 the Fed approved applications by Goldman Sachs and Morgan Stanley for emergency conversions into bank In 2008, GMAC held over $200 billion of assets and holding companies to ensure their survival. Federal owned a large Utah ILC with $33 billion of assets and agencies provided financial support totaling over $300 $17 billion of deposits. GMAC was the primary source billion to Goldman Sachs and Morgan Stanley through of financing for dealers and retail customers who pur- TARP capital infusions, FDIC debt guarantees, and chased and leased General Motors (GM) vehicles. In purchases of commercial paper and emergency loans 2007 and 2008, GMAC suffered crippling losses from by the Fed. Goldman Sachs and Morgan Stanley almost its subprime mortgage lending business and additional certainly would have failed without the federal govern- losses from its auto lending business. To prevent GMAC’s ment’s support.29 failure, the Fed approved GMAC’s emergency conver- sion into a bank holding company in December 2008. GE Capital Corporation was a subsidiary of General Federal agencies provided over $40 billion of finan- Electric (GE) and engaged in a wide range of financial cial assistance to GMAC in the form of TARP capi- activities. GE Capital held almost $700 billion of assets tal infusions, FDIC debt guarantees, and purchases of in 2008, including a Utah ILC. GE Capital experienced commercial paper and emergency loans by the Fed. The severe liquidity problems after Lehman Brothers failed, federal government bailed out GMAC so that it could including great difficulty in selling short-term com- provide financing for vehicle sales and leases made by mercial paper to fund its operations. The Fed responded GM and after federal agencies rescued both by purchasing $16 billion of GE Capital’s commercial automakers.27 paper, and the FDIC guaranteed over $70 billion of GE Capital’s newly-issued debt securities. GE Capital Merrill Lynch held almost $900 billion of assets would have faced very serious funding challenges and was the third largest U.S. securities broker-dealer without the federal government’s extensive financial in 2008. Merrill Lynch owned a Utah ILC with $60 assistance.30 billion of deposits as well as a federal savings associa- tion with $20 billion of deposits. Merrill Lynch suffered CIT Group was a large nonbank financial firm that huge losses from its involvement in high-risk activi- provided commercial lending and leasing services to ties, including subprime lending and securitization. To small- and medium-sized businesses, as well as subprime avoid collapse, Merrill Lynch agreed to be acquired mortgages and student loans to consumers. CIT held by Bank of America—at the urging of federal regula- $80 billion of assets in 2008, including a Utah ILC. In tors—during “Lehman weekend” in September 2008. December 2008, the Fed approved CIT’s application for Federal agencies subsequently provided more than $300 an emergency conversion into a bank holding company billion of financial assistance to Bank of America and after CIT recorded large losses and experienced severe Merrill Lynch in the form of TARP capital infusions, funding problems. CIT also received a $2.3 billion cap- asset and debt guarantees, purchases of commercial ital infusion from TARP. However, CIT’s problems con- paper, and emergency Fed loans. A significant por- tinued, and it filed for bankruptcy in November 2009. tion of that enormous rescue package covered Merrill CIT’s failure wiped out the federal government’s entire Lynch’s losses. Merrill Lynch would have failed, and it is TARP investment in the firm.31 doubtful whether Bank of America could have survived, without the federal government’s .28 Thus, the federal government provided massive bail- outs to rescue GMAC, Merrill Lynch, Goldman Sachs, Goldman Sachs and Morgan Stanley, the two larg- Morgan Stanley, and GE Capital during the financial est U.S. securities brokers, each held $1 trillion or crisis. In addition, the federal government lost its entire more of assets in 2008. Goldman Sachs and Morgan taxpayer-funded investment in CIT. Those bailouts and Stanley each owned a Utah ILC with over $25 billion losses illustrate the enormous systemic risks that are of assets. Goldman Sachs and Morgan Stanley—like likely to arise when large nonbank corporations acquire Merrill Lynch—were heavily involved in high-risk, ILCs and combine the operations of those ILCs with subprime-related activities during the boom leading to their other activities.

Volume 39 • Number 5 • May 2020 Banking & Financial Services Policy Report • 5 Fremont General provides another example of the reduce the danger of contagious spillovers of risks and potential risks created by ILCs and their parent com- losses between the financial system and the economy. panies. Fremont General owned Fremont Investment As discussed in the next section, those rescues extended and Loan, a California ILC with $13 billion of assets the federal “safety net” far beyond the banking system, in 2006. Fremont Investment and Loan was a top-ten thereby creating very large risks for the federal govern- subprime mortgage lender, and it had one of the worst ment and taxpayers. records among subprime lenders in terms of reckless underwriting, delinquencies, and defaults. The FDIC c. Further acquisitions of ILCs by commercial ordered Fremont to stop offering subprime mortgages firms would pose grave threats to the stability in March 2007. However, that directive came too late to of our financial system and the health of our save Fremont. Fremont General filed for bankruptcy in economy. June 2008, and the FDIC approved an emergency sale Merrill Lynch, Goldman Sachs, and Morgan Stanley of Fremont Investment and Loan’s branches, deposits, were large financial conglomerates that functioned as and other assets to CapitalSource, a newly-organized “shadow banks” before the financial crisis of 2007–09. California ILC. That emergency sale prevented the They offered federally-insured deposits, consumer loans, failure of Fremont Investment and Loan. However, the and commercial loans through the ILCs and thrifts they toxic subprime mortgages and mortgage-backed secu- controlled. In addition, they provided “deposit sub- rities issued by Fremont Investment and Loan resulted stitutes” in the form of money market mutual funds, in foreclosures for many borrowers and heavy losses for short-term commercial paper, and securities repurchase many investors.32 agreements (repos), all of which were payable in practice at par on demand. They also offered a wide array of sub- Accordingly, there is no doubt that corporate own- stitutes for bank loans. The activities of “shadow bank” ers of ILCs inflicted very significant costs on the U.S. financial conglomerates effectively mirrored the func- financial system and taxpayers during the financial cri- tions of bank-centered financial holding companies, sis of 2007–09. In addition, corporate owners eagerly which were authorized by the Gramm–Leach–Bliley exploited their ILCs’ ability to generate federally-sub- Act of 1999 (GLBA). GLBA marked the culmination of sidized, low-cost funding by offering FDIC-insured a 20-year campaign in which large banks, federal regula- deposits. For example, Merrill Lynch created “sweep” tors, and Congress undermined and ultimately repealed accounts that allowed its customers to transfer cash the New Deal-era risk buffers that separated banks from balances from their uninsured accounts at Merrill’s the capital markets.34 securities broker-dealer to their FDIC-insured deposit accounts at Merrill’s ILC. Merrill Lynch’s sweep accounts GLBA’s enactment produced a financial system that were attractive to customers, but those accounts greatly was dominated by large bank-centered and “shadow increased the risk of losses to the Deposit Insurance bank” financial conglomerates. The activities of those Fund. Similarly, GMAC’s ILC used its FDIC-insured financial conglomerates created fragile, high-risk net- deposits as a low-cost source of funding for loans that works that connected systemically important financial financed sales and leases of GM vehicles. Other com- institutions to all major segments of our financial mar- mercial owners of ILCs—including Volkswagen, Toyota, kets. The hazardous networks produced by large finan- and Target—also used their ILCs as captive financing cial conglomerates forced federal regulators to extend agencies to support sales of their products.33 the federal “safety net” for banks so that it encompassed all major segments of our financial markets during the Corporate owners and their ILCs have used com- financial crisis of 2007–09. The federal “safety net”— mon brand names and coordinated business strategies including the FDIC’s Deposit Insurance Fund, the Fed’s to achieve a close integration of their operations. As emergency lending programs, and the Fed-supervised shown above, close connections between ILCs and payments system—was originally intended to be avail- their parent companies forced federal bank regula- able only to federally-insured depository institutions. tors to deal with serious problems at large corporate However, the Fed and the Treasury Department created owners during the financial crisis of 2007–09. Federal a wide array of emergency programs between 2007 and agencies rescued several of those corporate owners to 2009, which provided comprehensive protection for the

6 • Banking & Financial Services Policy Report Volume 39 • Number 5 • May 2020 liabilities of banks, securities broker-dealers, insurance major segments of the financial markets to ensure the companies, and other “shadow banks.”35 survival of those conglomerates.38

The Fed and other leading central banks also adopted As explained above, the creation of giant financial “quantitative easing” (QE) policies to stabilize strug- conglomerates broke down the risk buffers established gling economies and provide liquidity to highly stressed during the New Deal and its aftermath. Those risk buf- financial markets. Under those QE policies, central fers prevented contagious spillovers of losses between banks made extensive purchases of government bonds, the banking system and the capital markets from World mortgage-backed securities, and (in some cases) corpo- War II through the 1980s. GLBA eliminated those buf- rate securities. QE policies caused the balance sheets of fers and allowed banks to establish full-scale affiliations the Fed, the Bank of England, the European Central with nonbank financial firms. By taking that fateful step, Bank, and the Bank of Japan to expand from $4 trillion GLBA greatly increased the likelihood that serious dis- to $15 trillion between 2007 and 2018.36 ruptions occurring in one sector of our financial sys- tem would spread to other sectors. The systemic dangers QE policies provided huge infusions of liquidity posed by large financial conglomerates forced regulators into the world’s financial markets. Repeated infusions to expand the federal “safety net” for banks to protect all of liquidity caused market participants to important segments of our financial markets during the view central banks as de facto guarantors of the stability financial crisis of 2007–09 and again during the current of financial markets. Expectations of continued central pandemic. Those vast expansions of the “safety net” have bank support encouraged a massive expansion of credit imposed great risks and costs on the federal govern- for governments, businesses, and households. Total global ment and taxpayers, and they have severely undermined debt levels increased from $167 trillion to $253 trillion the effectiveness of market discipline in our financial between 2007 and 2019, and global debt as a percentage system.39 of global GDP rose from 275% to 322% during that period. The enormous growth of global debt after the The same spreading of risks and costs—and the same financial crisis raised serious concerns about the sustain- impairment of market discipline—would occur on an ability of debt levels in both developed and developing even larger scale if the FDIC allows further acquisitions countries.37 of ILCs by nonfinancial (commercial) firms. The federal government’s rescues of GMAC, GE Capital, and CIT The huge debt burdens assumed by governments, demonstrate the hazards created by affiliations between businesses, and consumers left them in a highly vulner- commercial firms and ILCs. As explained in Part 2 able position when the COVID-19 pandemic suddenly below, allowing more acquisitions of ILCs by commer- struck countries around the world. Governments and cial firms would produce intense pressures for repealing central banks responded to the pandemic by recreat- our policy of separating banking and commerce, thereby ing most of the emergency programs they used during permitting combinations between all types of banks and the crisis of 2007–09. In addition, governments adopted all categories of commercial firms. major new stimulus programs, while central banks launched new types of liquidity assistance programs and Widespread affiliations between banks and com- aggressive new QE initiatives. The extraordinary speed mercial firms would greatly increase the likelihood of and scope of the responses by governments and cen- contagious spillovers of risks and losses between the tral banks to the COVID-19 pandemic demonstrated financial system and the economy. As commercial-fi- that global financial markets remain highly leveraged nancial conglomerates became systemically important and dangerously fragile, despite all of the post-crisis entities, the federal government would have powerful reforms. One of the most troubling developments is that incentives to spend massive sums to prevent serious dis- post-crisis reforms have not changed the basic structure ruptions from occurring in either the financial system of our financial system, including the unhealthy domi- or the economy.40 The federal government’s extraordi- nance of giant financial conglomerates within that sys- nary responses to the COVID-19 pandemic indicate tem. Consequently, governments and central banks have that our nation is already moving toward that perilous again been forced to provide unlimited support for all and very costly state of affairs.

Volume 39 • Number 5 • May 2020 Banking & Financial Services Policy Report • 7 Problems at large commercial-financial conglom- devastated their economies. The catastrophic crises of erates have frequently served as catalysts for systemic the 1990s in Japan, Mexico, and South Korea provide financial and economic crises in the past. The first major strong warnings about the risks of allowing banks to U.S. banking crisis of the Great Depression was precip- affiliate with commercial firms. Such affiliations greatly itated by the failures of two large commercial-finan- increase the likelihood of contagious crises that could cial conglomerates in late 1930. In November 1930, the wreak havoc on both the financial system and the downfall of Caldwell and Company—a large financial economy.43 and industrial conglomerate headquartered in Nashville, Tennessee—caused a regional banking panic in several 2. Further acquisitions of ILCs by commercial southern states. The following month, the collapse of firms would create toxic conflicts of interest Bank of United States—a large banking, securities, and would also pose serious threats to and real estate conglomerate in —dis- competition and consumer welfare. rupted financial markets in the Middle Atlantic region Acquisitions of ILCs by commercial firms produce and caused a serious loss of public confidence in the dangerous and destructive conflicts of interest. In 1970 U.S. banking system. In February 1933, the failures of and 1987, Congress amended the BHC Act to stop Michigan’s two largest banks—which had extensive commercial enterprises from acquiring FDIC-insured securities and real estate operations—forced Michigan banks. On both occasions, Congress determined that to declare a statewide bank holiday, thereby triggering a the creation of commercial-financial conglomerates nationwide banking panic.41 would seriously impair the objectivity of bank lending and encourage preferential and reckless credit practices. In May 1931, the collapse of Creditanstalt—Austria’s Congress recognized that commercially-owned banks biggest universal bank, which held ownership stakes in have strong incentives to (A) make unsound loans to many Austrian commercial enterprises—set off a devas- their commercial affiliates, (B) deny credit to competi- tating financial and economic crisis that swept through tors of their commercial affiliates, and (C) provide risky Europe. The European crisis resulted in widespread fail- loans to help customers buy goods or services from their ures and bailouts at large universal banks in Germany, commercial affiliates. The Senate committee report on Italy, and Belgium. The Great Depression’s impact was the 1987 legislation (CEBA) warned that allowing especially severe in the U.S. and in European countries commercial firms to own banks “raises the risk that the with universal banking systems. In both the U.S. and banks’ credit decisions will be based not on economic Europe, vulnerable networks that linked major banks, merit but on the business strategies of their corporate securities markets, and commercial firms produced cata- parents.”44 strophic spillovers of risks and losses that destroyed entire financial systems and economies. In contrast, Canada Congress’s strong concerns about the biased lend- and Great Britain did not experience systemic financial ing practices of commercially-owned banks were crises during the Great Depression. One reason for their well-founded. Commercially-owned ILCs have fre- superior performance was that banks in both countries quently adopted lending policies that support the were separated from securities markets and did not hold business activities of their parent company and other equity stakes in commercial firms.42 affiliates. The Proposed ILC Rule states that “[a] sig- nificant number of the 23 existing industrial banks During the 1990s, systemic financial and economic support the commercial or specialty oper- crises occurred in Japan, Mexico, and South Korea. In ations of their parent company.”45 In 2006, FDIC all three countries, leading banks were closely con- General Counsel Douglas Jones explained that two nected to large commercial firms through cross-share- commercially-owned ILCs—Volkswagen Bank and holding networks and other joint control arrangements. Toyota Financial Savings Bank—provided loans to Conglomerate-style networks were known as keiretsu finance purchases of vehicles manufactured by their in Japan and chaebol in South Korea, and they were parent companies. A third commercially-owned centered around wealthy families in Mexico. In the ILC—Target Bank—issued proprietary credit cards 1990s, all three nations experienced contagious cri- to businesses to finance their purchases of goods at ses that severely damaged their financial systems and Target stores.46 As discussed above, GMAC was the

8 • Banking & Financial Services Policy Report Volume 39 • Number 5 • May 2020 primary source of credit for dealers and consumers During serious financial disruptions, the Fed has who bought or leased GM vehicles.47 Square’s new- repeatedly waived the quantitative limits on affiliate ly-approved ILC will make loans to merchants who transactions under Section 23A of the Federal Reserve process their credit card transactions through Square’s Act. The Fed’s waivers have allowed big banks to provide proprietary payments system.48 huge amounts of financial assistance to their troubled nonbank affiliates. The Fed approved large-scale waivers Preferential, high-risk lending and other conflicts of of Section 23A after the terrorist attacks on 9/11 and interest have frequently occurred at commercial-finan- granted even more extensive waivers of Section 23A cial conglomerates in the past. Caldwell and Company, during the financial crisis of 2007–09. The Fed’s waivers Bank of United States, American Continental (the permitted major banks to make enormous transfers of parent company of Charles Keating’s Lincoln Savings funds to support their affiliated securities broker-deal- and Loan), and commercial-financial conglomerates in ers, sponsored mutual funds, and other nonbank affili- Japan, South Korea, and Mexico engaged in reckless ates. The Fed also approved waivers that allowed GMAC lending, preferential transfers of funds, and other abusive to finance most of GM’s and Chrysler’s sales of vehicles transactions that benefited their commercial affiliates after the federal government rescued both automak- and inflicted devastating losses on the depository insti- ers.52 As Saule Omarova pointed out, the Fed’s extraor- tutions they controlled.49 dinary waivers of Section 23A during the financial crisis authorized “massive transfers of funds” that “purposely The subsidies and other benefits that FDIC-insured exposed banks to risks associated with their affiliates’ depository institutions receive from the federal “safety nonbanking business and transferred [the] federal sub- net” create powerful incentives for commercial firms sidy outside the [banking] system.”53 to acquire ILCs. “Safety net” benefits include (1) low- cost funding from FDIC-insured deposits, (2) access to Based on past experience, it is very unlikely that fed- the Fed’s emergency lending programs for depository eral regulators would enforce affiliate transaction rules institutions, and (3) access to Fed-supervised payments against large commercial owners of ILCs during future systems for checks, credit cards, debit cards, online and systemic crises. As shown by GMAC’s example, regula- mobile payments, and wire transfers.50 tors would probably allow commercially-owned ILCs to make large transfers of funds to support their com- Supporters of commercially-owned ILCs argue mercial affiliates during future financial and economic that the Federal Reserve Act’s restrictions on affiliate disruptions. As a practical matter, those transfers would transactions and insider lending will prevent commer- extend the federal “safety net” for FDIC-insured depos- cial parent companies from abusing the federal “safety itory institutions into many commercial sectors of our net.” However, those complex and technical provisions economy. are very difficult to enforce in a timely and effective manner. Troubled financial institutions have frequently The access of commercially-owned ILCs to the violated those restrictions in the past. For example, two federal “safety net” would give significant competitive large ILCs that failed in 1999 and 2003—Pacific Thrift advantages to their parent companies. In addition to the and Southern Pacific Bank—violated affiliate transac- low-cost funding provided by their ILCs’ deposits, large tion rules before they failed. In 1994, the Government commercial owners would receive implicit “catastro- Accountability Office (GAO) studied 175 bank failures phe insurance” in the form of expected federal support that occurred during the 1980s. The GAO determined during future systemic crises. In contrast, smaller com- that 82 of the failed banks breached insider lending lim- mercial firms that could not satisfy the capital require- its, and 49 of the failed banks violated affiliate trans- ments and other conditions set forth in the Proposed action rules. American Continental and its subsidiary, ILC Rule would not able to acquire ILCs and would Lincoln Savings and Loan, collapsed after committing be placed at a serious competitive disadvantage. Thus, widespread and flagrant infractions of insider lending allowing commercial firms to acquire ILCs would cre- limits, affiliate transaction rules, and other prudential ate a highly skewed playing field favoring commercial regulations. The Lincoln Savings debacle cost the federal firms that own ILCs and handicapping those that do government $2.7 billion.51 not.54

Volume 39 • Number 5 • May 2020 Banking & Financial Services Policy Report • 9 The financial sector and many commercial sectors shown by the demise of the New Deal’s risk buffers that of our economy (including the information technology separated banks from the capital markets, the creation of industry) already display very high levels of concentra- “loopholes” in prudential buffers inevitably leads to the tion and are dominated by a small group of giant firms. destruction of those protections.57 High concentration levels enable big incumbent firms to leverage their market power and capture unjustified Thus, allowing “Big Tech” firms to acquire ILCs super-profits by (i) imposing unfair prices on custom- would almost certainly lead to large-scale combinations ers and suppliers, (ii) acquiring smaller competitors or between giant technology firms and big banks. Those destroying them with predatory pricing policies, and (iii) combinations would magnify the problems that already deterring entry by new competitors.55 The Proposed exist due to the excessive levels of concentration, the ILC Rule would allow big commercial firms to gain an “” subsidies, and the unhealthy political additional competitive edge by acquiring ILCs, thereby influence that our technology giants and megabanks further impairing competition and harming customers currently command and exploit. and suppliers in many lines of commerce. 3. The FDIC’s limited supervisory powers over Allowing acquisitions of ILCs by “Big Tech” firms parent companies and other affiliates of ILCs like Alphabet (Google), Amazon, Apple, Facebook, and are plainly inadequate to prevent the systemic Microsoft would fundamentally change our financial risks, conflicts of interest, and threats to system and economy in ways that are likely to be very competition and consumer welfare created by harmful to consumers and communities. “Big Tech” commercially-owned ILCs. firms already enjoy significant potential advantages The FDIC’s circumscribed supervisory author- over banks in the fields of automation, artificial intel- ity over parent companies and other affiliates of ILCs ligence, data management, and mobile payments. The cannot remove the grave dangers posed by commer- rapid growth of Alibaba, Ant Financial, and in cially-owned ILCs. The Proposed ILC Rule cites only ’s financial system indicates that “Big Tech” firms two statutes that specifically empower the FDIC to could potentially dominate major segments of our supervise Covered Companies that control ILCs. First, financial industry if those firms are allowed to estab- under 12 U.S.C. 1820(b)(4), the FDIC may examine lish “in-house banks” and exploit their technological “the affairs of any affiliate” of an ILC, including the advantages. Financial regulators around the world are parent company, to the extent “necessary to disclose just beginning to grapple with a wide array of public fully . . . the relationship between the [ILC] and any policy issues related to the potential entry of “Big Tech” such affiliate; and . . . the effect of such relationship firms into the banking industry. Those issues include on the [ILC].” Second, under 12 U.S.C. 1831o-1(b), concerns about unfair competition, abusive sharing of the FDIC may require a Covered Company “to serve customer data, violations of customer privacy rights, and as a source of financial strength” for its ILC subsidi- operational and systemic risks resulting from ownership ar y. 58 Neither of those statutes would allow the FDIC of banks by giant technology firms.56 The FDIC should to exercise consolidated supervision over Covered not preempt the ongoing consideration of those vitally Companies. important issues by allowing “Big Tech” firms to acquire ILCs. The Proposed ILC Rule would require Covered Companies to enter into written agreements obligat- Acquisitions of ILCs by “Big Tech” firms would pro- ing Covered Companies and their nonbank subsidiar- duce intense pressures for removing all of the BHC Act’s ies to satisfy eight commitments.59 The examination restrictions on joint ownership of banks and commercial and reporting commitments set forth in proposed 12 firms. “Big Tech” firms would not be satisfied with mak- C.F.R. 354.4(a)(1), (a)(3)(iii) & (iv), and (a)(4) appear ing “toehold” acquisitions of ILCs. They would want to fall within the FDIC’s limited supervisory author- to build a bigger competitive presence in the financial ity over “affiliates” of ILCs under 12 U.S.C. 1820(b)(4). industry by acquiring large banks. Conversely, big banks The capital and liquidity maintenance commitment set would argue that Congress must create a “level playing forth in proposed 12 C.F.R. 354(a)(7) seems to be con- field” by allowing banks to acquire technology firms. As sistent with the FDIC’s authority to require a Covered

10 • Banking & Financial Services Policy Report Volume 39 • Number 5 • May 2020 Company “to serve as a source of financial strength” supervision. Lack of consolidated supervision is for its ILC subsidiary under 12 U.S.C. 1831o-1(b). The problematic because the organization may operate commitment contained in proposed 12 C.F.R. 354(a)(5), and manage its businesses on an integrated basis, requiring annual audits for ILCs, appears to be a proper and, in the Federal Reserve’s experience, risks exercise of the FDIC’s general authority to supervise that cross legal entities and that are managed on a and ensure the safety and soundness of FDIC-insured consolidated basis cannot be monitored properly depository institutions. through supervision directed at any one, or even several, of the legal entity subdivisions within the In contrast, it is doubtful whether the FDIC has overall organization. Moreover, history demon- authority to require Covered Companies and their strates that financial distress in one part of a busi- nonbank subsidiaries to agree to the other commit- ness organization can spread, sometimes rapidly, to ments contained in proposed Section 354.4. The other parts of the organization.62 FDIC does not cite any specific sources of statutory authority that would (A) allow the FDIC to examine In the same 2016 report, the FDIC acknowledged Covered Companies and their nonbank subsidiaries that parent companies of ILCs “are not subject to con- to the extent described in proposed Section 354.4(a) solidated supervision.” The FDIC also did not disagree (2), or (B) require Covered Companies to provide with the Fed’s analysis of the risks created by that lack annual reports covering all of the matters described in of consolidated supervision, although the FDIC said proposed Section 354.4(a)(3)(i) & (ii), or (C) require that it used “prudential conditions” to “mitigate” those Covered Companies to accept the corporate gover- risks.63 In fact, as shown above in Part 1(b), several large nance restrictions and tax allocation obligation set corporate owners of ILCs either failed or required fed- forth in proposed Section 354.4(a)(6) & (8). Covered eral bailouts to survive during the financial crisis. Those Companies could potentially file lawsuits to challenge failures and bailouts revealed the risks and costs that the FDIC’s authority to impose those commitments on resulted from the FDIC’s inability to supervise those an involuntary basis.60 corporate owners effectively.

Even assuming, for the sake of argument, that the In January 2007, when the FDIC extended its FDIC could require Covered Companies to satisfy all of moratorium on acquisitions of ILCs by commercial the commitments listed in proposed Section 354.4, the firms, the FDIC expressed its “continuing concerns resulting regime would still fall well short of the com- regarding the commercial ownership of industrial prehensive, consolidated supervision that the Fed exer- banks and the lack of a Federal Consolidated Bank cises over bank holding companies. Under proposed Supervisor” for commercial parent companies of Section 354.4, the FDIC could not conduct unlimited, ILCs. At the same time, the FDIC proposed a set of full-scope examinations of Covered Companies and supervisory commitments for parent companies that their nonbank subsidiaries. The FDIC also could not owned ILCs and “engaged only in financial activi- impose consolidated capital requirements or consoli- ties.” The FDIC’s proposed supervisory commitments dated liquidity requirements on Covered Companies. for “financial” parent companies were similar to the Additionally, the FDIC could not require large Covered commitments set forth in proposed Section 354.4. Companies to conduct stress tests or to prepare resolu- However, the FDIC made clear in 2007 that it was not tion plans pursuant to 12 U.S.C. 5365.61 willing to rely on those supervisory commitments as a satisfactory basis for regulating commercial owners In the 2016 joint report to Congress and FSOC, the of ILCs. Instead, the FDIC extended its moratorium Fed emphasized the risks created by the absence of a to ensure that commercial firms would not acquire consolidated supervisory regime for parent companies ILCs.64 and affiliates of ILCs: Even if Congress designated the FDIC (or some [T]he ILC exemption creates special supervi- other federal agency) as the consolidated supervisor of sory risks because an ILC’s parent company and commercially-owned ILCs, that step would not remove nonbank affiliates are not subject to consolidated the grave dangers posed by commercial-financial

Volume 39 • Number 5 • May 2020 Banking & Financial Services Policy Report • 11 conglomerates. A consolidated federal supervisor for 4. Adoption of the Proposed ILC Rule would commercially-owned ILCs would be hobbled by be contrary to the public interest factors at least four unsolvable problems. First, neither the specified in the Federal Deposit Insurance FDIC nor any other federal agency has the experi- Act and would also violate the Administrative ence and resources needed to regulate large commer- Procedure Act. cial firms. Any consolidated federal supervisor would Under the Federal Deposit Insurance Act (FDI Act), face enormous logistical challenges, including the the FDIC must consider several public interest fac- great difficulty and expense of hiring personnel with tors when it reviews applications for deposit insurance, expertise in many different commercial sectors of the changes in control, and mergers involving ILCs. Those U.S. economy. The well-documented failures of fed- public interest factors give the FDIC broad discretion eral financial agencies to regulate bank-centered and to deny transactions that (1) present serious risks to “shadow bank” financial conglomerates effectively the Deposit Insurance Fund or the stability of the U.S. prior to the financial crisis of 2007–09 should con- banking system or financial system, (2) are likely to have vince us that any federal supervisor would be even significant anticompetitive effects, or (3) are inconsistent less likely to succeed in regulating large commercial– with the “convenience and needs of the community to financial conglomerates.65 be served.” As the Supreme Court has explained, the “ultimate test imposed” by such factors is the agency’s Second, designating a consolidated federal supervisor assessment of the overall “public interest.”67 for commercial owners of ILCs would imply that the supervisor was a reliable monitor of the soundness and Under 12 U.S.C. 1815 and 1816, the FDIC may deny solvency of those commercial firms. That implication applications by ILCs for deposit insurance after consid- would provide a highly undesirable “seal of approval” for ering the “risk presented . . . to the Deposit Insurance commercial owners of ILCs. Consolidated supervision Fund” as well as the “convenience and needs of the would also strengthen the expectation among market community to be served.” Under 12 U.S.C. 1817(j)(7), participants that the federal government would inter- the FDIC may reject proposed changes in control of vene to protect commercial owners of ILCs from failure ILCs after considering the “anticompetitive effects” of during serious financial and economic disruptions. such transactions, their impact on the “convenience and needs of the community to be served,” and any “adverse Third, designating a consolidated federal supervisor effect on the Deposit Insurance Fund.” Under 12 U.S.C. for commercial owners of ILCs would greatly expand 1828(c)(5), the FDIC may disapprove proposed mergers the scope and intensity of federal regulation over mul- involving ILCs after considering the “anticompetitive tiple commercial sectors of our economy. The resulting effects” of such mergers, their impact on the “conve- expansion of federal oversight would severely under- nience and needs of the community to be served,” and mine the effectiveness of market pricing and market dis- any “risk to the stability of the United States banking or cipline within those affected sectors. financial system.”

Fourth, large commercial owners of ILCs would If adopted, the Proposed ILC Rule would allow almost certainly be considered “too big to fail” by reg- widespread acquisitions of ILCs by commercial firms. ulators and market participants. Their presumed “too As shown above, those acquisitions would threaten (1) big to fail” status, along with their extensive lobby- to inflict large losses on the Deposit Insurance Fund and ing resources and political influence, would also make other components of the federal “safety net” for banks them “too big to discipline adequately.” For all four during future crises, (2) to undermine the stability of the reasons, any attempt to create a system of consolidated U.S. banking and financial systems, (3) to injure com- supervision for commercial–financial conglomerates petition by creating an unlevel playing field between would be unworkable and undesirable. The imprac- commercial firms that own ILCs and those that do not, ticability and adverse effects of consolidated supervi- and (4) to harm the welfare of consumers and com- sion for commercial–financial conglomerates present munities by promoting conflicts of interest, impairing additional persuasive reasons for prohibiting their competition, endangering customer privacy, aggravating existence.66 the risks of systemic economic and financial crises, and

12 • Banking & Financial Services Policy Report Volume 39 • Number 5 • May 2020 increasing the likelihood of taxpayer-financed bailouts 1817(j)(7), and 1828(c)(5). The Proposed ILC Rule cites of commercial–financial conglomerates. those public interest factors only briefly, and it does not explain whether the FDIC currently agrees or disagrees For all of the above reasons, adoption of the Proposed with the agency’s previous consideration of those factors ILC Rule would be contrary to the public interest fac- when it imposed its moratorium in 2006 and extended tors that the FDIC is required to consider under the that moratorium in 2007.71 FDI Act. When the FDIC imposed a moratorium on acquisitions of ILCs by commercial firms in July 2006 In sum, the Proposed ILC Rule (1) does not provide and extended that moratorium in January 2007, the the factual, legal, and policy basis for the FDIC’s cur- FDIC expressed significant concerns about the poten- rent decision to consider and approve acquisitions of tial dangers of such acquisitions, including risks to the ILCs by commercial firms, and (2) does not describe Deposit Insurance Fund and the U.S. financial system, the FDIC’s current evaluation of the risks, public pol- harmful conflicts of interest, adverse effects on compe- icy concerns, and statutory public interest factors that tition, and the absence of consolidated supervision for the agency cited when it imposed an 18-month mor- commercial owners of ILCs.68 The FDIC stated that it atorium on acquisitions of ILCs by commercial firms had authority to impose the moratorium based on “the between July 2006 and January 2008 (and that the broad statutory objectives of the FDI Act which include agency presumably considered when it did not approve maintenance of public confidence in the banking sys- any such acquisitions between January 2008 and March tem by insuring deposits and maintaining the safety 2020). In addition, the Proposed ILC Rule does not and soundness of insured depository institutions.” The specifically invite the public to comment on the risks, FDIC also concluded that it should not approve acqui- concerns, and factors that the FDIC cited in July 2006 sitions of ILCs by commercial firms until it completed and January 2007, or to comment on the FDIC’s cur- an evaluation that “carefully and comprehensively” rent decision to change its policy and permit acquisi- studied the relevant risks and public policy concerns. tions of ILCs by commercial firms. None of the twenty Without such an evaluation, the FDIC determined that “Questions” included in the Proposed ILC Rule refers approving such acquisitions “may frustrate the substan- to the risks and concerns identified by the FDIC in tive policies the agency is charged with promoting.” In 2006 and 2007, or to the reasons why the FDIC now the 2016 joint report to Congress and FSOC, the Fed intends to change its policy.72 cited many of the same risks, policy concerns, and pub- lic interest factors to support its recommendation that In view of the glaring omissions described Congress should prohibit ownership of ILCs by com- above, the Proposed ILC Rule is unlawful and mercial firms.69 invalid under the public notice requirement of the Administrative Procedure Act (APA), 5 U.S.C. 553(b) The Proposed ILC Rule does not include any dis- (3). The Proposed ILC Rule violates Section 553(b) cussion of the FDIC’s current evaluation of the risks (3) because it does not provide adequate public notice and public policy concerns that the FDIC identified of (1) the FDIC’s current evaluation of the risks and in 2006 and 2007 and the Fed reiterated in 2016. The public policy concerns that the FDIC identified in Proposed ILC Rule only briefly refers to those risks 2006 and 2007 with regard to acquisitions of ILCs and public policy concerns, and it does not provide the by commercial firms; (2) the FDIC’s current evalua- FDIC’s current assessment of either the significance or tion of the public interest factors that the FDIC must the validity of those risks and concerns. The Proposed consider under the FDI Act; and (3) the factual, legal, ILC Rule does not argue that the FDIC’s moratorium and policy basis for the FDIC’s decision to change its was misguided, or that the risks and concerns motivat- policy on acquisitions of ILCs by commercial firms. ing that moratorium are no longer relevant.70 Accordingly, the Proposed ILC Rule violates Section 553(b)(3) because it does not provide the public with Similarly, the Proposed ILC Rule does not provide adequate notice of, and a reasonable opportunity to the FDIC’s current evaluation of the public interest fac- submit informed comments on, the FDIC’s assessment tors that the FDIC must consider in connection with of crucially important issues as well as the FDIC’s rea- transactions involving ILCs under 12 U.S.C. 1816, sons for changing its policy.73

Volume 39 • Number 5 • May 2020 Banking & Financial Services Policy Report • 13 If adopted, the Proposed ILC Rule would also be economy, and society, thereby creating the equivalent of “arbitrary and capricious,” and therefore unlawful, a wartime emergency. It would be highly inappropriate under a separate provision of the APA, 5 U.S.C. 706(2) for the FDIC to adopt the Proposed ILC Rule during (A). As explained above, the Proposed ILC Rule rep- the pandemic, especially in view of the Rule’s far-reach- resents a fundamental change in policy from the position ing and potentially very harmful effects on our financial taken by the FDIC when it imposed a moratorium on system, economy, and society. acquisitions of ILCs by commercial firms in July 2006, extended that moratorium in January 2007, and did not Conclusion approve any acquisitions of ILCs by commercial firms For the reasons set forth above, the FDIC should between January 2008 and March 2020 (as indicated withdraw the Proposed ILC Rule or postpone any fur- by its CapitalSource order in June 2008). As also shown ther action on the Rule, until (1) the enormous prob- above, the Proposed ILC Rule does not provide an ade- lems caused by the COVID-19 pandemic have been quate explanation of the factual, legal, and policy basis successfully resolved, and (2) the FDIC has taken all for the FDIC’s decision to change its policy on such of the steps required by the Administrative Procedure acquisitions. Indeed, the Proposed ILC Rule lacks any Act, as described in Part 4 above. The FDIC should not discussion of the reasons why the FDIC now disagrees approve any additional acquisitions of commercial firms with the agency’s previous assessment of the relevant by ILCs until all of the foregoing actions have been risks, public policy concerns, and statutory public inter- completed. est factors. The Proposed ILC Rule is therefore “arbi- trary and capricious” and invalid under the APA because Notes it does not provide “good reasons” for the FDIC’s deci- 1. FDIC Docket RIN 3064-AF31, 85 Fed. Reg. 17771 (Mar. 31, sion to change its policy, including “a ‘reasoned expla- 2020) (proposed regulation to be codified in a new 12 C.F.R. nation for disregarding’ the ‘facts and circumstances’ that Part 354) [hereinafter “Proposed ILC Rule”]. underlay its previous decision.”74 2. Id. at 17771–72 (including note 7), 17776–77. 3. See statements by FDIC Director Martin J. Gruenberg regard- ing the FDIC’s approval of deposit insurance for ILCs owned Consequently, adoption of the Proposed ILC Rule by Square and Nelnet, available at https://www.fdic.gov/news/ would violate the APA unless the FDIC first completes news/speeches/spmar1820b.html (Gruenberg Square Statement), the following steps: (1) the FDIC must evaluate the and https://www.fdic.gov/news/news/speeches/spmar1820c.html risks, public policy concerns, and statutory public inter- (Gruenberg Nelnet Statement). est factors that the agency considered and cited when it 4. See Proposed ILC Rule, supra note 1, at 17772–76; Brendan Pedersen, “14 years after Walmart, banks face a new ILC bogey- imposed its moratorium in July 2006 and extended that man,” (Oct. 25, 2019), available on Westlaw moratorium in January 2007; (2) the FDIC must pro- at 2019 WLNR 32164813. In June 2008 (five months after vide “good reasons” for changing its policy with respect the FDIC’s moratorium expired), the FDIC approved deposit to acquisitions of ILCs by commercial firms, including insurance for CapitalSource Bank, a newly-organized California a “reasoned explanation” why the FDIC now disagrees ILC. The FDIC allowed CapitalSource’s parent companies to engage “only in financial activities,” and the FDIC required with the agency’s previous assessments of those risks, those companies to divest any “non-conforming investments” public policy concerns, and public interest factors; and (investments not permitted by the BHC Act) within one year. (3) the FDIC must provide public notice of the factual, Thus, the FDIC did not allow CapitalSource’s parent companies legal, and policy basis for its change in policy, and the to engage in commercial activities. The FDIC did not approve FDIC must give the public a reasonable opportunity to deposit insurance applications for any other ILCs until the FDIC approved Square’s and Nelnet’s applications on March submit comments on the FDIC’s change in policy and 18, 2020. See Proposed ILC Rule, supra note 1, at 17773; and its stated reasons for making that change. the FDIC’s CapitalSource order dated June 17, 2008, ¶ 7 [here- inafter “FDIC CapitalSource Order”], available at https://www. There is an additional compelling reason why the fdic.gov/regulations/laws/bankdecisions/depins/capital_source.pdf. FDIC should withdraw the Proposed ILC Rule or 5. Proposed ILC Rule, supra note 1, at 17773–74, 17776. indefinitely postpone further action on that Rule. Our 6. Brendan Pedersen, “Rakuten withdraws ILC application, plans to refile,” American Banker (Mar. 23, 2020), available on Westlaw nation is currently preoccupied with the challenges of at 2020 WLNR 8486374 (quoting Rakuten’s announcement). responding to the global COVID-19 pandemic. The 7. Rakuten’s global website (“About Us” and “Leadership”), pandemic has severely disrupted our financial system, available at https://global.rakuten.com/corp/about/.

14 • Banking & Financial Services Policy Report Volume 39 • Number 5 • May 2020 8. Joe Adler, “GOP senator tries to block commercial firms from 23. Board of Governors of the Fed. Res. Sys., Fed. Deposit Ins. becoming banks,” American Banker (Nov. 14, 2019), available Corp., and Office of the Comptroller of the Currency, Report to on Westlaw at 2019 WL 34223566; Rachel Witkowski, “ABA the Congress and the Financial Stability Oversight Council Pursuant voices ‘serious concerns’ about e-commerce firm’s ILC bid,” to Section 620 of the Dodd-Frank Act (Sept. 2016), at 28–29, American Banker (July 26, 2019), available on Westlaw at 2019 32–35 (Fed’s recommendation that Congress should prohibit WLNR 22961305. ownership of ILCs by commercial firms); id. at 52, 74 (FDIC’s 9. See 12 U.S.C. 1843; Arthur E. Wilmarth, Jr., “Wal-Mart and discussion of ILCs and recommendations to Congress) [here- the Separation of Banking and Commerce,” 39 Connecticut Law inafter “2016 Joint Report to Congress and FSOC”], available Review 1539, 1566–73, 1587 (2007), available at http://ssrn. at https://www.federalreserve.gov/newsevents/pressreleases/files/ com/abstract=984103 [hereinafter Wilmarth, “Wal-Mart”]. bcreg20160908a1.pdf. 10. Proposed ILC Rule, supra note 1, at 17772–73, 17780. 24. Proposed ILC Rule, supra note 1, at 17772–73, 17775–76; 11. Id. at 17772–73; Wilmarth, “Wal-Mart,” supra note 9, at 1550, Wilmarth, “Wal-Mart,” supra note 9, at 1549–53, 1572–73, 1569–73 (quoting 1993 CRS report on p. 1573). 1597, 1615–16. 12. Wilmarth, “Wal-Mart,” supra note 9, at 1541–53, 1572 (quoting 25. Proposed ILC Rule, supra note 1, at 17776; see also id. at 17782. Sen. Garn’s statement on April 10, 2006, during one of the 26. 2016 Joint Report to Congress and FSOC, supra note 23, at 34 FDIC’s three public hearings on Walmart’s application). (note 116) (Fed’s statement); id. at 52 (FDIC’s statement). 13. Fed. Deposit Ins. Corp., “Moratorium on Certain Industrial Loan 27. Congressional Oversight Panel, March Oversight Report, Company Applications and Notices,” 71 Fed. Reg. 43482, 43483 The Unique Treatment of GMAC under the TARP (Mar. 10, (Aug. 1, 2006) [hereinafter “2006 FDIC Moratorium Notice”]. 2010) [hereinafter “COP March 2010 Report”], available at 14. Fed. Deposit Ins. Corp., “Moratorium on Certain Industrial https://cybercemetery.unt.edu/archive/cop/20110401232836/ Bank Applications and Notices,” 72 Fed. Reg. 5290, 5291 http://cop.senate.gov/reports/library/report-031110-cop.cfm; Saule (Feb. 5, 2007) [hereinafter “2007 FDIC Moratorium Extension T. Omarova, “From Gramm-Leach-Bliley to Dodd-Frank: The Notice”]. Unfulfilled Promise of Section 23A of the Federal Reserve 15. Wilmarth, “Wal-Mart,” supra note 9, at 1542–47, 1552–53; Act,” 89 North Carolina Law Review 1683, 1756–61 (2011); see Arthur E. Wilmarth, Jr., “Subprime Crisis Confirms Wisdom also the Fed’s order, dated Dec. 24, 2008, approving GMAC’s of Separating Banking and Commerce,” 27 Banking & emergency conversion into a bank holding company, available Financial Services Policy Report No. 5, May 2008, at 1–2, avail- at https://www.federalreserve.gov/newsevents/pressreleases/files/ able at http://ssrn.com/abstract=1253453 [hereinafter Wilmarth, orders20081224a1.pdf. “Subprime Crisis”); “Wal-Mart confirms it withdraws ILC 28. Arthur E. Wilmarth, Jr., “A Two-Tiered System of Regulation application,” (Mar. 16, 2007) (quoting Wal-Mart’s Is Needed to Preserve the Viability of Community Banks announcement), available at https://www.reuters.com/article/ and Reduce the Risks of Megabanks,” 2015 Michigan idUSIN20070316110341WMT20070316. State Law Review 249, 257–64, available at http://ssrn.com/ 16. Proposed ILC Rule, supra note 1, at 17772. abstract=2518690; Financial Crisis Inquiry Commission, The 17. Wilmarth, “Wal-Mart,” supra note 9, at 1569–73; see also id. at Financial Crisis Inquiry Report (Jan. 2011) [hereinafter “FCIC 1572 and note 181 (discussing the sparse and uninformative Report”], at xix–xx, 8, 23, 53–56, 63–66, 88–89, 129–34, 149– legislative history of Senator Garn’s exemption for ILCs). 54, 188–95, 202–04, 256–59, 277–79, 296–98, 325–28, 333–41, 18. Id. at 1569–73 (quoting Senate Report No. 100-19 (1987) at 2, 353–55, 374–77, 382–86, available at https://www.govinfo.gov/ 8, 9, reprinted in 1987 U.S. Code Cong. & Ad. News 492, 498, content/pkg/GPO-FCIC/pdf/GPO-FCIC.pdf; see also the Fed’s 499). order, dated Nov. 26, 2008, approving Bank of America’s acqui- 19. Id. at 1571 (note 175) (summarizing floor statements by 11 sition of Merrill Lynch, available at https://www.federalreserve. Senators and House members). gov/newsevents/pressreleases/orders20081126a.htm. 20. See id. at 1584–86 (discussing Congress’s passage of the 1999 29. FCIC Report, supra note 28, at xix–xx, xxiv–xv, 23, 42–44, law that prohibited further acquisitions of thrifts by commer- 50–56, 61–66, 88–89, 130–34, 140–46, 150–54, 166–70, cial firms); Kanikal v. Attorney General, 776 F.3d 146 (3d Cir. 192–93, 202–04, 226–27, 235–38, 296–300, 339, 353–56, 2015) (refusing to interpret the literal text of one federal stat- 360–63, 371–79; see also the Fed’s orders, dated Sept. 22, 2008, ute to override the clearly intended purpose of another fed- approving the emergency conversions of Goldman Sachs eral law because the second law’s legislative history confirmed and Morgan Stanley into bank holding companies, avail- Congress’s strong intent that the second law’s policy should able at https://www.federalreserve.gov/newsevents/pressreleases/ take priority). In the course of its opinion, the Third Circuit orders20080922a.htm; Better Markets, “Goldman Sachs Failed stated, “In resolving ambiguity, we must allow ourselves some 10 Years Ago Today: Email shows Goldman admitted it was recognition of the existence of sheer inadvertence in the leg- ‘toast’ and only survived due to government bailouts” (Sept. islative process.” 776 F.3d at 152–53 & note 5 (quoting Cass v. 20, 2018), available at https://bettermarkets.com/newsroom/gold- United States, 417 U.S. 72, 83 (1974)). man-sachs-failed-10-years-ago-today; Matt Taibbi, “Turns Out 21. 2006 FDIC Moratorium Notice, supra note 13, at 42482–83; That Trillion-Dollar Bailout Was, In Fact, Real,” Rolling Stone 2007 FDIC Moratorium Extension Notice, supra note 14, at (Mar. 18, 2019), available at https://www.rollingstone.com/politics/ 5291–93. politics-features/2008-financial-bailout-809731/. 22. See FDIC CapitalSource Order, supra note 4, ¶ 7, and the dis- 30. FCIC Report, supra note 28, at 345–46, 358–59, 371, 374; cussion of the CapitalSource order in note 4. Jeff Gerth, “Paulson Book: Behind the Scenes, GE’s Top Exec

Volume 39 • Number 5 • May 2020 Banking & Financial Services Policy Report • 15 Confided Credit Woes,” ProPublica (Feb. 5, 2010) available 37. Satyajit Das, “The World Will Pay for Not Dealing with Debt,” at https://www.propublica.org/article/paulson-general-electric-im- Bloomberg (Dec. 23, 2018), available at https://www.bloomberg. melt-financial-crisis-022010; Jeff Gerth, “How a Loophole com/opinion/articles/2018-12-23/world-will-pay-for-not-reining- Benefits General Electric in Bank Rescue,”ProPublica (June in-debt-growth; Aaron Kuriloff, “Taking Stock of the World’s 28, 2009), available at https://www.propublica.org/article/ Growing Debt,” Wall Street Journal (Jan. 2, 2019), at R1; John how-a-loophole-benefits-general-electric-628; Peter Edmonston, Plender, “The seeds of the next debt crisis,” Financial Times “G.E. Warns of Low Fourth-Quarter Profit,” New York Times (Mar. 4, 2020), available at https://www.ft.com/content/27cf0690- (Dec. 3, 2008), at B5; Kate Linebaugh, “General Electric: 5c9d-11ea-b0ab-339c2307bcd4; see also Institute of International Trains, Planes and a Mammoth Bank,” Wall Street Journal (Jan. Finance, Global Debt Monitor: Sustainability Matters (Jan. 13, 18, 2013), at B1. 2020), available at https://www.iif.com/Portals/0/Files/content/ 31. COP March 2010 Report, supra note 27, at 67–70; Damian Global%20Debt%20Monitor_January2020_vf.pdf. Paletta, Serena Ng & Randall Smith, “The CEO Left Off the 38. Michael Mackenzie, “The Federal Reserve has gone well past Lifeboat: CIT’s Peek Staked It All on a Bailout,” Wall Street the point of ‘QE infinity’,” Financial Times (Mar. 22, 2020), Journal (July 18, 2009), at A1; Meena Thiruvengadam, “TARP available at https://www.ft.com/content/11b338a2-6d0c-11ea- Stake in CIT Is Wiped Out,” Wall Street Journal (Feb. 11, 2010), 89df-41bea055720b; Molly Smith, Alexandra Harris, and at C6; Dan Wilchins & Elinor Comlay, “CIT files for prepack- Matthew Boesler, “The Fed Brings the Global Financial System aged bankruptcy,” Reuters (Nov. 1, 2009), available at https:// Back From the Abyss,” Bloomberg Law (Mar. 28, 2020); Tommy www.reuters.com/article/us-cit/cit-group-files-for-prepackaged-bank- Stubbington, “‘Nationalisation’ of bond markets helps calm ruptcy-idUSTRE5A01NX20091101; see also the Fed’s order, nerves,” Financial Times (Mar. 23, 2020), available at https://www. dated Dec. 22, 2008, approving CIT’s emergency conversion ft.com/content/3e9abeb2-6dd9-11ea-9bca-bf503995cd6f; Nick into a bank holding company, available at https://www.federalre- Timiraos, “Fed’s New Loans Are the Broadest Ever,” Wall Street serve.gov/newsevents/pressreleases/files/orders20081222a1.pdf. Journal (April 10, 2020), at A1; Nick Timiraos, “The Fed Takes 32. Valerie Bauerlein, Damian Paletta & David Enrich, “Housing Uncharted Course to Stem Virus Damage,” Wall Street Journal Woes Shake Bank in California: FDIC Tells Fremont to (Mar. 31, 2020), at A1; see also Wilmarth, “Road to Repeal,” Shore Up Capital,” Wall Street Journal (Mar. 29, 2008), at A1; supra note 34, at 517–24, 541–49 (describing the extraordinary FCIC Report, supra note 28, at 14–15, 90, 168, 221–22, 233; responses by governments and central banks to the 2007–09 FDIC CapitalSource Order, supra note 4, at 1; U.S. Senate financial crisis, and the continuing dominance of large financial Permanent Subcommittee on Investigations, Wall Street conglomerates in the post-crisis financial system). and the Financial Crisis: Anatomy of a Financial Collapse 39. See Plender, supra note 37; Wilmarth, “Road to Repeal,” supra 10–11, 19 (note 16), 21, 124, 237–39, 358–61, 484–88, note 34, at 446–49, 452–55, 512–24, 541–49. 514–16 (April 13, 2011), available at https://fraser.stlouisfed. 40. Arthur E. Wilmarth, Jr., “Beware the Return of the ILC,” org/title/5094. American Banker (Aug. 2, 2017), available on Westlaw at 2017 33. COP March 2010 Report, supra note 27, at 19–30, 48–56; WLNR 23853030. Wilmarth, “Wal-Mart,” supra note 9, at 1588–98, 1606–13. 41. Wilmarth, “Wal-Mart,” supra note 9, at 1559–63; see also Barry 34. Arthur E. Wilmarth, Jr., “The Road to Repeal of the Glass- Eichengreen, Hall of Mirrors: The Great Depression, the Great Steagall Act,” 17 Wake Forest Journal of Business & Intellectual Recession, and the Uses – and Misuses – of History 124–33, 164–68 Property Law 441, 445–64, 492–503, 510–19, 543–48 (2017) (2015). [hereinafter Wilmarth, “Road to Repeal”], available at http:// 42. Eichengreen, supra note 41, at 140–49; Isabel Schnabel, “The ssrn.com/abstract=3026287. German Twin Crisis of 1931,” 64 Journal of Economic History 35. Id. at 445–49, 460–64, 519–24, 541–47; see also 2016 Joint 822–71 (2004); Forrest Capie, “Commercial Banking in Britain Report to Congress and FSOC, supra note 23, at 32–33; Between the Wars,” in Charles H. Feldstein, ed., Banking, Zoltan Pozsar et al., Shadow Banking (Fed. Res. Bank of NY Currency, and Finance in Europe Between the Wars 395–413 (1995); Working Paper, July 2010), at 22–53, 61–64, available at http:// Joost Jonker and Jan Luiten van Zanden, “Method in the ssrn.com/abstract=1645337; Morgan Ricks, The Money Problem: Madness? Banking Crises Between the Wars, an International Rethinking Financial Regulation 5–6, 32–37, 96–122, 184–99, Comparison,” in Charles H. Feldstein, ed., supra, at 77, 81–86, 223–37, 301 (2016). In 2002, I predicted that GLBA’s enact- 90–91; Douglas J. Forsyth, “The rise and fall of German-inspired ment would probably force regulators to extend the fed- mixed banking in Italy, 1894-1936,” in Harold James et al., eds., eral “safety net” to cover our entire financial system during The role of banks in the interwar economy 179-200 (1991); Arthur future systemic crises. See Wilmarth, “Road to Repeal,” supra E. Wilmarth, Jr., “Did Universal Banks Play a Significant Role note 34, at 453–54 (quoting Arthur E. Wilmarth, Jr., “The in the U.S. Economy’s Boom-and-Bust Cycle of 1921-33? A Transformation of the U.S. Financial Services Industry, 1975– Preliminary Assessment,” in 4 Current Developments in Monetary 2000: Competition, Consolidation, and Increased Risks,” 2002 & Financial Law 559, 580–85, 611–13, 644–45 (notes 257 & University of Illinois Law Review 215, 446–47, available at http:// 258) (2005), available at http://ssrn.com/abstract=838267. ssrn.com/abstract=315345). 43. Wilmarth, “Wal-Mart,” supra note 9, at 1598–1606. 36. Enda Curran & Rich Miller, “Central Banks’ Window to 44. Id. at 1567–71 and note 173 (discussing the legislative histo- Restock Ammo Is Closing,” Bloomberg (Jan. 20, 2019), avail- ries of the 1970 and 1987 amendments to the BHC Act, and able at https://www.bloomberg.com/news/articles/2019-01-20/ quoting Senate Report No. 100-19, at 8, reprinted in 1987 U.S. central-banks-window-to-restock-ammo-is-closing-as-growth-slows. Code Cong. & Admin. News 498).

16 • Banking & Financial Services Policy Report Volume 39 • Number 5 • May 2020 45. Proposed ILC Rule, supra note 1, at 17773. 150–55, 170–74, 187–89, 197–200, 204–06, 279–83, 288–91, 46. Wilmarth, “Wal-Mart,” supra note 9, at 1595 (citing the July 12, 302–08, 328–52; Lev Menand, “Too Big to Supervise: The Rise 2006 statement of FDIC General Counsel Douglas H. Jones). of Financial Conglomerates and the Decline of Discretionary 47. COP March 2010 Report, supra note 27, at 19–30, 48–56. Oversight in Banking,” 103 Cornell Law Review 1527, 1551–74, 48. Gruenberg Square Statement, supra note 3. 1583–88 (2018). 49. Wilmarth, “Wal-Mart,” supra note 9, at 1560–63, 1576–78, 66. For discussions of the second, third, and fourth problems 1601–06. described above, see Wilmarth, “Wal-Mart,” supra note 9, at 50. Id. at 1545–52, 1588–93; see also 2016 Joint Report to Congress 1618–21; Wilmarth, “Subprime Crisis,” supra note 15, at 14; and FSOC, supra note 23, at 32–33 (Fed’s statement of concerns Statement of E. Gerald Corrigan, President, Federal Reserve about permitting commercially-owned ILCs to gain access to Bank of NY, on April 11, 1991, before the Subcommittee on the federal “safety net” for banks). Telecommunications and Finance of the House Committee on 51. Wilmarth, “Wal-Mart,” supra note 9, at 1576–78, 1594–98; Energy and Commerce, reprinted in 77 Fed. Res. Bull. 411, Wilmarth, “Subprime Crisis, supra note 15, at 8–9. 418–20 (1991). 52. Omarova, supra note 27, at 1735–46, 1755–61; Wilmarth, 67. United States v. Third National Bank in Nashville, 390 U.S. 171, “Subprime Crisis,” supra note 15, at 9. 184–85 (1968); see also Vial v. First Commerce Corp., 564 F. Supp. 53. Omarova, supra note 27, at 1762–63. 650, 666 (E.D. La. 1983). 54. Wilmarth, “Wal-Mart,” supra note 9, at 1588–93, 1621. 68. 2006 FDIC Moratorium Notice, supra note 13, at 43482–83; 55. See Thomas Philippon, The Great Reversal: How America Gave 2007 FDIC Moratorium Extension Notice, supra note 14, at Up on Free Markets (2019); Timothy Wu, The Curse of Bigness: 5291–93. Antitrust in the New Gilded Age (2018). 69. 2006 FDIC Moratorium Notice, supra note 13, at 43483; see 56. See Kathryn Petralia, Thomas Philippon, Tara Rice & Nicholas also 2007 FDIC Moratorium Extension Notice, supra note 14, Véron, Banking Disrupted? Financial Intermediation in an Era of at 5293; 2016 Joint Report to Congress and FSOC, supra note Transformational Technology 25–38, 44–82 (Geneva Reports on 23, at 28–29, 32–35. the World Economy 22, 2019), available at https://www.cimb.ch/ 70. See Proposed ILC Rule, supra note 1, at 17774–75. uploads/1/1/5/4/115414161/banking_disrupted_geneva22-1.pdf. 71. See id. at 17771–72, 17776, 17782. 57. See Wilmarth, “Road to Repeal,” supra note 34. 72. Only two of the twenty “Questions” in the Proposed ILC Rule 58. See Proposed ILC Rule, supra note 1, at 17774. refer to public interest factors specified in the FDI Act, and 59. See id. at 17778–82, 17785–86 (discussing and quoting pro- those Questions do not deal with the risks and public pol- posed 12 C.F.R. 354.3 and 354.4). icy concerns identified by the FDIC in July 2006 and January 60. See Securities Industry Ass’n v. Board of Governors, 839 F.2d 47, 2007. See Proposed ILC Rule, supra note 1, at 17782–83 67–68 (2d Cir.) (invalidating the “market share limitation” (“Question 18,” asking for comments on an unrelated issue imposed by the Fed on broker-dealer subsidiaries of bank hold- involving “competitive effects,” and “Question 19,” asking for ing companies because that limitation was beyond the Fed’s comments on an unrelated issue involving “convenience and statutory authority), cert. denied, 486 U.S. 1059 (1988). needs”). Neither “Question 18” nor “Question 19” refers to 61. See 2016 Joint Report to Congress and FSOC, supra note 23, the FDIC’s moratorium on acquisitions of ILCs by commer- at 17–22, 32–34 (Fed’s discussion of the FDIC’s lack of consol- cial firms or the FDIC’s decision to change its policy on such idated supervisory authority over parent companies and affil- acquisitions. iates of ILCs); see also Wilmarth, “Wal-Mart,” supra note 9, at 73. The APA’s public notice requirement, 12 U.S.C. 553(b)(3), 1613–17 (discussing the same subject). ensures that (1) a proposed agency rule will receive adequate 62. 2016 Joint Report to Congress and FSOC, supra note 23, at scrutiny from a diversity of public views, and (2) affected par- 33–34 (Fed’s discussion). ties will be given a fair opportunity to present their objec- 63. Id. at 52 (FDIC’s discussion). tions to the proposed rule. Daimler Trucks North America LLC 64. 2007 FDIC Moratorium Extension Notice, supra note 14, v. E PA , 737 F.3d 95, 100 (D.C. Cir. 2013). The “adequacy” of at 5293; see also Fed. Deposit Ins. Corp., “Industrial Bank an agency’s notice of proposed rulemaking “must be tested by Subsidiaries of Financial Companies,” 72 Fed. Reg. 5217, determining whether it would fairly apprise interested per- 5222–23 (Feb. 5, 2007) (explaining that the supervisory com- sons of the ‘subjects and issues’ before the agency.” Prometheus mitments proposed by the FDIC in 2007 would apply to ILC Radio Project v. FCC, 373 F.3d 372, 411 (3d Cir. 2004) (quoting parent companies that “engaged only in financial activities”; American Iron & Steel Institute v. EPA, 568 F.2d 284, 293 (3d Cir. the proposed commitments would not apply to “companies 1977)). “A notice of proposed rulemaking is legally inadequate engaged in commercial activities” because commercial firms if it does not ‘adequately frame the subjects for discussion.’” would be subject to the FDIC’s extended moratorium on ILC Federal Savings Bank v. FDIC, 836 F. Supp. 3, 7 (D.D.C. acquisitions). 1993) (quoting Connecticut Power & Light Co. v. NRC, 673 F.2d 65. Wilmarth, “Road to Repeal,” supra note 34, at 445–49, 460–64, 525, 533 (D.C. Cir. 1982)). 519–24, 530–47; Wilmarth, “Wal-Mart,” supra note 9, at 1617– 74. Organized Village of Kake v. U.S. Dept. of Agriculture, 795 F.3d 18; see also FCIC Report, supra note 28, at xviii, xxiii–xxvii, 3–4, 956, 966, 968 (9th Cir. 2015) (en banc) (quoting FCC v. Fox 9–17, 20–23, 44–51, 54–56, 75–80, 92–101, 111–14, 125–26, Television Stations, Inc., 556 U.S. 502, 515, 516 (2009)).

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