Editorial: Bank Secrecy: Why Guarantee Wrongdoers Anonymity?

The Connecticut Law Tribune

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When a state-insured financial institution fails, and Connecticut taxpayers foot the bill, the public is left in the dark as to the causes of the failure. In Connecticut, as elsewhere, if a state financial institution should go into receivership, the relevant regulatory reports by publically-funded examiners — regarding loans to favored insiders, directors, and officers and politicians — are sealed from public view. If the institution is insured by the Federal Deposit Insurance Corp., examiner records are almost never available to the public under federal law. Connecticut law does not appear to be more transparent

The language of Connecticut General Statutes § 36a-237g(b) is facially innocuous. Records of banks in receivership may "upon approval by the superior court" be disposed of by the receiver if those records are "obsolete and unnecessary to the continued administration of the receivership process." In practical effect, this language — like similar statutes and regulations in 44 other states — have historically shielded from public scrutiny those responsible for mismanagement, fraud and waste.

Secton 36a-237g(b) is a remnant of a anachronistic practice that has shielded bankers, regulators and politicians from scrutiny over the better part of the last century. Every state in New England, plus New York, New Jersey and Pennsylvania, have either destroyed banking records from the 1920s and 1930s or have kept them under stringent sealing orders. The public cannot learn from events whose documentation is either destroyed or permanently sealed. The banking industry, regulators and politicians have openly fought release of failed bank regulatory records even 50 to 100 years after insolvency. In some states, release of even 50-year-old banking records are felonies which no "public duty" or sunshine laws have been able to overcome.

In his 1952 memoirs, former President Herbert Hoover blamed his political opponents for forcing the publication of the names of banks and the amounts of loans received from the Reconstruction Finance Corp. The RFC was the centerpiece of Hoover's recovery program after the 1929 crash. Hoover claimed that disclosure of the names of these banks and the amounts of their loans caused panic runs, mass withdrawals and subsequent failures. He particularly noted Cook County, Ill., where numerous banks failed in June 1932.

Hoover's rationale — disclosure leads to runs on banks which lead to failures — became an anthem of the banking industry from the 1950s to the present. It was also pure nonsense. The publication of RFC loans to the 35 state and national banks of Chicago and Cook County which failed in June 1932 occurred on Jan. 25, 1933, seven months after the banks closed. However, the mantra underlying this policy of enforced secrecy lives on.

Insider abuse and fraud, regulatory failure, official secrecy and revolving-door rotation of officials between the public and private sectors — all evils apparent in the Chicago/Cook County failures of 1932 — remain to this day. The federal and state bank secrecy laws have concealed mismanagement and outright criminal behavior of those responsible for the epidemic of savings and loans failures during the 1980s, and the collapse of Enron and WorldCom in the early 2000s. These were all variations of the obsessive secrecy surrounding the financial industries after Hoover. In the case of Enron, the frauds of its management were facilitated by officials of two of the nation's major banks, Citicorp and Chase. In existence were bank examiner reports with a detailed analysis of sham transactions and phony loans; these have never been made available to the public. The collapse of 2008 was aided by "innovative" financial schemes — mortgage-based derivations and credit swaps — concealed under the same rationale of secrecy that Hoover argued is essential to the financial industry.

Bringing this sorry history home, if a Connecticut financial institution fails, or goes into receivership, §36a-237g(b) allows a receiver to request that a Superior Court judge order the destruction of that institution's records unless those records remain necessary "to the continued administration of the receivership process." If the bank remains in operation, unsecured loans to favored officers or directors, or payments to public officials, will never be revealed. If the bank is closed, no discernible Connecticut statute or regulation requires — or even allows — the receiver or the court to publically disclose the regulatory evaluations addressing the institution's failure. Reckless, unsecured insider loans will not be revealed, even though the evaluations exposing the practices were paid for by taxpayer money.

It is fitting that 2014 marks the 100th anniversary of the publication of Louis Brandeis' book, "Other People's Money and How the Bankers Use It." In that remarkable work, Brandeis wrote: "Sunlight is said to be the best of disinfectants; electric light the most effective policeman." A regulatory system would fail, Brandeis argued, if it denied public access to financial information and relied solely on the government to process and interrupt what its regulators found about the behavior of those regulated. He called for "real disclosure" of banking activities to the public.

Connecticut deserves no less. If any Connecticut bank, thrift or other financial institution goes into receivership, or fails, all of the regulatory evaluations of that institution should be made public at the time the appointment of the receiver, or no later than one year after appointment. Brandeis' theory that illumination is the best disinfectant is as valid today as it was a century ago.•

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