ICBA - Publications - Merrill Lynch - Proud Owners of a Utah Industrial Loan Company

Merrill Lynch - Proud Owners of a Utah Industrial Loan Company

NOVEMBER 14, 2003


Banker Update: Merrill Lynch - Proud Owners of a Utah Industrial Loan Company

Back when community bankers cared passionately about comprehensive deposit insurance reform-in the days before the influx of deposits and when the BIF ratio threatened to fall below 1.25%, which could have triggered a $.23 premium-there was righteous indignation about the free riders, led by Merrill Lynch. Free riders are those large financial institutions who leveraged deposit insurance coverage to attract huge amounts of deposits on which they had paid no FDIC insurance premiums.

Merrill Lynch is advertising $200,000 in individual coverage levels, since it owns more than one bank-including a $65 billion Utah-based industrial loan company (ILC). Citi's Salomon Smith Barney continues to offer $1 million in individual coverage levels. Tens of billions of FDIC-insured deposit dollars have flowed in.

On November 6, New York attorney general Elliot Spitzer appeared on the Jim Lehrer News Hour to talk about the Wall Street scandals. He flatly stated that one of his hardest decisions was, "Should we have indicted a Merrill Lynch or a Salomon Smith Barney …?" He was talking about a criminal indictment (for activities not related to ILC deposit growth). He recalled that it was a criminal indictment that destroyed Arthur Anderson after the Enron collapse.

Spitzer fortunately concluded that his goal was to change the rules of the game, which were fundamentally flawed, rather than "to destroy a Merrill Lynch or Salomon Smith Barney."

At the ACB's annual convention and reportedly at the just-concluded Conference of State Bank Supervisors' Washington meeting, Utah commissioner of financial institutions G. Edward Leary chanted his mantra that Utah ILCs are well and adequately regulated and that the FDIC chairman himself has said that Utah's state chartered ILC banks present no safety and soundness problems. What Commissioner Leary conveniently didn't emphasize is that regulation of the parent-Merrill headquarters in New York-falls far short of bank holding company regulation. Hopefully Leary and the FDIC were totally unaware of the happenings at Merrill's parent that opened the door to a possible criminal indictment, which conceivably could have brought down the ILC bank.

We also note the report of the FDIC's Office of Inspector General on the failure of a California ILC, the Pacific Thrift and Loan Company, Woodland Hills, CA. In looking at what led to the failure of Pacific Thrift and Loan, the inspector general concluded that there was insufficient regulatory oversight at the parent, which took on more debt than it could handle and engaged in improper intercompany transactions with the ILC.

We thank Attorney General Spitzer for not pursuing criminal charges against Merrill, since this could have had adverse consequences on Merrill's ILC and, in turn, the FDIC.

And we again give our blessing to the California politicians who led the charge to pass legislation blocking the application of Wal-Mart to purchase a California ILC-legislation that the California bank commissioner worked against. And we respectfully ask Commissioner Leary, how is your oversight of the parent companies of Utah ILCs, whose assets now total some $100 billion and climbing?