Beruflich Dokumente
Kultur Dokumente
EXHIBIT 1
VERN McKINLEY, )
)
Plaintiff, ) Civil Action No. 09-1263 ESH
)
v. )
)
FEDERALDESOSITINSURANCE )
CORPORATION, et 01., )
)
Defendants. )
-------------------------)
DECLARATION OF VERN MCKINLEY
McKinley v. Federal Deposit Insurance Corporation, et 01., Case No. 09-1263 (ESH), pending in
the U.S. District Court for the District of Columbia. In addition, I am an independent consultant
and attorney who regularly advises government counterparts from central banks, deposit
insurance institutions, and financial institution supervisory agencies worldwide on legal and
policy issues.
("FDIC"). I began my career with the FDIC in 1985 as an Assistant Bank Examiner in the Dallas
Region during the banking crisis in Texas in the 1980s. I was responsible for working on bank
troubled or failing financial institutions, including the preparation of bid packages for failing
banks.
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("Federal Reserve") as a Research Assistant in the Division of Monetary Affairs. Under the
supervision of economists, I was responsible for working with and had access to confidential
data on the System Open Market Account, which is the portfolio of securities through which
4. From 1990 to 1995, I worked for the Resolution Trust Corporation (as an
employee of the FDIC) and its Oversight Board as a unit and section chief in the Office of the
Chief Financial Officer. I worked with confidential data on operating financial institutions that
(Evening) Division student, I worked as an attorney for the Treasury Department's Office of
Thrift Supervision from 1996 to 1999. I worked with financial institution application
6. From 1999 to the present, I have advised a number of central banks, deposit
insurers and financial institution supervisors in the U.S. and globally regarding their operations.
I have worked with a wide range of confidential financial institution data and agency
central banks or deposit insurers. This type of transaction allows an institution to stay open as
a going concern rather than closing the institution outright or letting it "fail." The FDIC is
looked upon as a benchmark institution worldWide, and information on the FDIC's open bank
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assistance and resolution practices is very useful for central banks, deposit insurers, and
8. While working at the FDIC and Federal Reserve, I played an ancillary role in and
had the opportunity to observe a number of FDIC resolutions involving open bank assistance.
In particular, I observed the open bank assistance transactions for BancTexas and First City
Bancorporation of Texas. Because of the large amount of public funds involved and the
questionable efficacy of open bank assistance transactions, such transactions are matters of
insurance agencies, and financial institution supervisory agencies, I also research and monitor
developments concerning the financial sector. Over the last fifteen years, I have had a number
of articles and analyses published regarding various timely financial sector topics.
information from the FDIC regarding the open bank assistance it approved for Wachovia Bank,
N.A. in late-September 2008. Specifically, I served a ForA request on the FDIC seeking the
follOWing:
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11. The FDIC claims that, on December 18, 2008, I had a telephone conversation
with FDIC FOIA Specialist Jerry Sussman in which I allegedly limited the scope of my FOIA
request to the minutes of a September 29,2008 meeting of the FDIC Board of Directors only.
While I did have a conversation with Mr. Sussman in early December 2008, the described
telephone conversation never took place. I was in Morocco on December 18, 2008 on a
business trip and was unavailable for such a phone call. I believe what occurred is that I
received a telephone message from Mr. Sussman on or about December 18,2008, in which Mr.
Sussman stated that the information I requested would be most efficiently satisfied by securing
the minutes of the September 29,2008 meeting. Looking back at my emails, I note that Mr.
Sussman sent me a message on January 6, 2009 stating that I clarified the scope of my request,
but I neither acknowledged nor agreed with this statement. In fact, in response to that email, I
noted that I tried to do some additional research to reduce the scope of my request, but I was
not successful. Nonetheless, in the FDIC's January 13, 2009 response to my FOIA request, the
FDIC asserted that I had "c1arified l l my rOJA request during a December 18,2008 telephone
conversation with Mr. Sussman. On January 26, 2009, I sent Mr. Sussman an email denying that
any telephone conversation had taken place on December 18, 2008 because I had been on a
business trip in Morocco that week. I asked Mr. Sussman to clarify the timing of our purported
discussions. In his response the following day, January 27,2009, Mr. Sussman asserted, in
pertinent part:
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A copy of my email exchange with Mr. Sussman on January 26-27, 2009 is attached hereto and
governments, I have an understanding of the various types of information that commonly are
kept confidential in a fractional-reserve banking regime. Howevert I also understand the types
of information that can be released more freely, especially after the passage ohime. Based on
that historically have been made available to the public regarding open bank assistance
transactions such as the Wachovia Bank, N.A. transaction that is the subject of my FOIA request
to the FDIC.
13. Over the past eighty years with the advent of the modern banking system, there
have been three periods of major and prolonged financial crisis. The first and most severe
financial crisis was during the Depression era ofthe 1930s, a period during which over 9,000
1
banks failed, ultimately leading to the creation of the FDIC. The second major financial crisis
was during the 1980s and early 1990s, a period when nearly 3,000 financial institutions failed or
were provided financial assistance. 2 The third period is the crisis that manifested itself in 2007. 3
14. The case of Continental fllinois National Bank ("Continental tl ) , which in 1984 was
the seventh-largest bank in the United States, is analogous to that of Wachovia Bank, N.A.
During the major financial crisis of the 1980s and early 1990s, Continental was on the brink of
2 For an excellent summary, see George Hanc (primary author), liThe Banking Crises of the 19805 and Early 19905:
Summary and Implications," History of the Eighties: Lessons for the Future, Volume I: An Examination of the
Banking Crises of the 19805 and Early 19905, p. 3, Federal Deposit Insurance Corporation, 1997.
3 The arbiter of the start of recessions, the National Bureau of Economic Research, dates the beginning of the most
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failure. In May 1984, the FDIC Board of Directors approved open bank assistance for
Continental. 4 The threat presented by a failure of Continental was unprecedented at the time,
and the seriousness of its potential failure was variously described as follows:
• C. Todd Conover, Comptroller of the Currency:5 "In our collective judgment, had
Continental failed and been treated in a way in which depositors and creditors were not
made whole, we could very well have seen a national, if not an international, financial
crisis the dimensions of which were difficult to imagine. None of us wanted to find
out." 6
• Fernand J. St. Germain, Chairman ofthe Committee on Banking, Finance and Urban
Affairs of the House of Representatives: " ... today we return to this forum faced with
what is, for all practical purposes, the granddaddy of bank failures, a $44 billion money
center bank that rolled into the ditch ... Continental presents the greatest multitude of
banking question [sic] ever to come before this committee.,,7
• William M. Isaac, FDIC Chairman: "The effects would have been catastrophic ... [t]here
could have been widespread instability throughout banking, throughout the thrift
system, and there would have been massive corporate bankruptcies throughout the
Midwest and elsewhere."s
@> Irvine H. Sprague, FDIC Director: "The only things that seemed clear were not only that
the long-term cost of allowing Continental to fail could not be calculated, but also that it
might be so much as to threaten the FDIC fund itself."9
15. In support of its motion for summary judgment, the FDIC has submitted the
Declaration of Christopher J. Spoth, Senior Deputy Director of the Division of Supervision and
4 For an excellent summary, see Lee Davison (primary author}, "Continental Illinois and Too Big to Fail," History of
the Eighties; Lessons for the Future, Volume I: An Examination of the Banking Crises of the 1980s and Early 19905,
p. 235, Federal Deposit Insurance Corporation, 1997
5
6 Inquiry Into Continental Illinois Corp. and Continental Illinois National Bank, Hearings Before the Subcommittee
on Financial institutions Supervision, Regulation and Insurance of the Committee on Banking, Finance and Urban
Affairs, House of Representatives, Ninety-Eighth Congress, Second Session, September 18, 19 and October 4, 1984,
Report 98-111, p. 288 (hereinafter "lnquiry").
7 Inquiry, pp. 1, 5. It should be noted that because of the provision of open bank assistance, Continental did not
ultimately fail.
8 Inquiry, pp. 479-480.
9 Irvine H. Sprague, Bailout (New York; Basic Books, Inc., 1986), 155.
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Compliance of the FDIC. In his declaration, Spoth references two key data elements regarding
the crisis that manifested itself in 2007: bank failures and number of banks on the FDIC's
"problem list." At the time of the problems at Continental, these statistics were similarly grim,
as demonstrated by Table 1:
balance was under pressure throughout the prior crisis period and stood at a level of <$7
billion> as of year-end 1991. It remained at a negative balance for five quarters until March 31,
1993. 10
10
Question and Answer "14. When was the last time the
insurance fund had a negative balance, and why? The only previous time the FDIC reported a negative fund
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17. Based on a review ohhe data set forth in the Spoth Declaration regarding the
crisis that manifested itself in 2007, it would be logical to infer that the FDIC did not release
information about the details ofthe Continental resolution until the late 1980s, when the
number of failures, assistance transactions, and problem banks had subsided or the early 1990s
when the FDIC Deposit Insurance Fund was restored to a positive balance.
18. In reality, the FDIC released detailed information regarding the underlying
justification for the open bank assistance it provided to Continental within months of doing so.
The FDIC initially provided assistance to Continental in May 1984. A mere five months later, the
FDIC released highly detailed information about the justification for the assistance during
hearings held before the U.S. House of Representatives Subcommittee on Banking, Finance and
Urban Affairsll on September 18 and 19, 1984 and October 4, 1984. The detailed information
released by the FDIC during the course of these hearings was very similar to the type of
information I am seeking from the FDIC regarding the open bank assistance it was prepared to
® The number of bank failures Irkely to be triggered by the failure of Continental Illinois
was discussed: "Sixty-six banks, as you know, had deposits in Continental in amounts in
excess of the total net worth of the bank. Another 113 banks had deposits in
Continental amounting to between 50 and 100 percent of their net worth. If
Continental had failed and had been treated as a payoff, certainly those 66 banks would
have failed and probably a goodly number of the 113 would have failed, if not
balance was during the last banking crisis in the late 1980s and early 19905. The FDIC reported a negative fund
balance as of December 31, 1991 of approximately -$7.0 billion due to setting aside a large 1$16.3 billion) reserve
for future failures. The fund remained negative for five quarters, until March 31, 1993, when the fund balance was
approximately $1.2 billion."
11 Inquiry.
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immediately thereafter, then certainly within some period of time afterward. So let us
say that we could easily have seen another hundred bank failures. 1f12
'" Information from examination reports, including examination ratings: ({Reading the
examination reports, FDIC's supervisory personnel did spot the severity ofthe problems.
In May 1983, ignoring the Comptroller of the Currency's lukewarm rating of a '3/ (risks
above normal) the FDIC declared the bank a full scale '4' (serious financial weakness)
and threw the illustrious name of Continental on the agency's infamous list of problem
13
banks."
'" Internal FDIC memos to Chairman Isaac regarding downstream correspondent bank
exposure to Continental Illinois disclosed in full: "Approximately 2,299 banks had funds
invested in Continental as of April 30, 1984. Of those, 976 had funds in excess of
$100,000 invested .... No adjustment was made for FDIC coverage. In all 66 banks had
more than 100% of their capital in funds at Continental and another 113 banks had
14
between 50% and 100% oftheir capital in funds at Continental...."
'" House Subcommittee Staff Report, flContinentallllinois National Bank Failure and Its
Potential Impact on Correspondent Banks" was discussed and conclusions detailed:
"Chairman St. Germain: Your chart indicates how many banks with greater than 99.4
percent of their assets in Continental would have probably failed? Mr. Dugger: The
chart indicates that there would be six banks. Chairman St. Germain: Six banks? Mr.
Dugger: Yes." 1S
<II Initial comments by Chairman St. Germain to FDIC Chairman Isaac regarding the analysis
by FDIC: "All this controversy about numbers-all this confusion in the public's mind
about the bailout-might have been avoided had your office done its job up front when
the bailout question first came up. I am shocked that the keeper of the insurance fund
did not insist right from the opening gun on a top-to-bottom cost analysis .... In that
breathless conference call to the Congress the night before the bailout, we all heard the
numbers 2,400 and 75-2,400 with relationships with Continental and 75 that would go
down the tubes if you didn't let Continental have the money."16
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• FDIC Chairman Isaac's response to Chairman St. Germain: "I have never predicted and
this agency has never predicted the number of banks that would have failed as a result
of a deposit payoff in Continental.,,17
• Internal FDIC memo to the FDIC Board of Directors dated May 17,1984 disclosed in full:
"Against this background, DBS [Division of Bank Supervision) believes that there are
sufficient facts to determine that Continental is in danger of closing .... However, we
believe that the continued operation of Continental is essential to provide adequate
banking services to the community .... The possible losses to the downstream
correspondent banks and banks that have provided funding to Continental would
threaten the stability of the U.S. banking industry.... A failure of Continental would
severely disrupt international and domestic money markets.,,18
• Transcript of the meeting of the Board of Directors of the FDIC May 17, 1984, when the
Board approved assistance for Continental Illinois, a meeting that was closed to public
observation, as read aloud in its entirety by Chairman St. Germain: "May 1984, closed
to public observation, the transcript of the meeting of the Board: At 7:30AM, on May
17,1984, the Board of Directors ofthe Federal Deposit Insurance Corporation met in
st
the FDIC New York regional office located at 345 Park Avenue, 21 floor, New York, NY,
to consider a certain matter which it voted pursuant to subsections ...."19
19. There is no evidence I am aware of that the release of information within five
months ofthe initial decision on Continental open bank assistance in any way undermined the
stability of Continental, an open operating institution at the time, or any other financial
institution.
K .1~c1are under penalty of perjury that the foregoing is true and correct. Executed on ~
Vern McKinley
"-_./
17 Inquiry, p. 471.
18 Inquiry, pp. 522- 523.
19 InqUiry, pp. 577 - 581.
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EXHIBIT A
RE: FDIC FOIA Log No. 08-0889 Tuesday, January 27, 2009 8:03 AM
From: "Sussman, Jerry" <
To: "McKinley Vern" <' .
Cc: "Fisch, Fredrick L," <
Thank you for your inquiry regarding the dates on which you and I
discussed the status of your request, made by your electronic mail
message of November 18, 2008, in which you requested, pursuant to the
Freedom of Information Act, 5 U.S.C. 552 ("FOIA"), information with
respect to the meeting of the FDIC's Board of Directors concerning the
decision to authorize the purchase of Wachovia Corporation by Citigroup,
Inc., rather than by Wells Fargo.
The administrative record within the FOIA case file for your request
reflects that we exchanged a number of electronic mail messages, and
that we spoke by telephone on more than one occasion. In particular,
the case file reflects that, on December 3, 2008, you and I had a
comprehesnive discussion about the status of your FOIA request,
including our interpretation of same, and the potential applicability of
the Government in the Sunshine Act, 5 U.S.C. 552b. Subsequent to our
December 3, 2008, telephone conversation, we completed our records
search and our preliminary disclosure review. I thereafter attempted to
contact you. The adminstrative record reflects that, on December 18,
2008, I left a telephone message for you in which I provided status
advice to you.
conversation.
Sincerely,
Jerry,
I have been preoccupied the last few days since I received the FDIC FOIA
letter from Mr. Fisch. I am focused on it now and would like to point
out an error in it. The letter notes that we had a telephone
conversation on December 18, 2008. This could not be true. I was on a
business trip in Morocco that week and have attached my itinerary to
show how my week was committed there. I was not available to talk and do
not remember having an international call with you at all that week.
Thanks,
Vern