Mckinley Supporting Declaration

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EXHIBIT 1 TO PLAINTIFF'S MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANT FDIC'S MOTION FOR SUMMARY JUDGMENT AND IN SUPPORT OF PLAINTIFF'S CROSS-MOTION FOR PARTIAL SUMMARY JUDGMENT

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA VERN McKINLEY, Plaintiff,

v.

) ) ) )

Civil Action No. 09-1263 ESH

)

FEDERALDESOSITINSURANCE CORPORATION, et 01., Defendants.

) ) ) ) )

-------------------------) DECLARATION OF VERN MCKINLEY I, Vern McKinley, hereby declare as follows: 1.

I am the plaintiff in the Freedom of Information Act ("FOIA") lawsuit captioned

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. 2.

I also am a former employee of the Federal Deposit Insurance Corporation

("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 examinations and handling confidential financial institution information, much of it related to troubled or failing financial institutions, including the preparation of bid packages for failing banks.

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3.

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In 1988, I began working at the Board of Governors of the Federal Reserve

("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 monetary policy is implemented, among other duties. 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 were likely or probable candidates for failure. 5.

After attending George Washington University Law School as a Part Time

(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 information of a confidential nature. 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 operational data, including in a number of countries experiencing severe financial crises. 7.

The power to undertake open bank assistance is a common power granted to

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 financial institution supervisors worldwide. 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 substantial public interest. 9.

In addition to working as a consultant for central banks, deposit insurers, deposit

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. 10.

As part of my ongoing research efforts, on November 18, 2008, I requested

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: I am requesting further details on information contained in the following press release regarding Wachovia: . The source of this power is Section 13(c) of the FDI Act (12 U.S.C. 1823(c)). There is a requirement that under this section under the emergency determination there must be a finding of "serious adverse effects on economic conditions or financial stability" if the action is not taken. I would like any information available on this determination such as meeting minutes or supporting memos of how this determination was made.

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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: Given the substantial administrative record, it is conceivable that my earlier reference to December 18, 2008, may have been incorrect. However, while I cannot now categorically confirm whether we did or did not speak by telephone on December 18, 2008, I can confirm that the administrative record reflects that I left a telephone message for you on that date ....

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A copy of my email exchange with Mr. Sussman on January 26-27, 2009 is attached hereto and incorporated herein as Exhibit A. 12.

Based on my 24 years of experience working in government or advising

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 my professional experience and my ongoing research, I am aware ohhe types of information 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

,:1':;:'

:"

" , "

':\

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 ). Other signs of financial sector recent recession in December 2007 L stress were also present in late 2007. 2

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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

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. 6

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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: Failures and Assistance

Problem Banks

Spoth Declaration

100+

400+

1980 1981 1982 1983 1984

22 40 119 99 106

75 96 213 242 300

180 204 262 470 534 382

423

(Continental)

1985 1986 1987 1988 1989

1990 1991 1992

271 181

1993

50

399

263 179 151 158 178 92

33

Source: Declaration of Christopher J. Spoth; Federal Deposit Insurance Corporation, Failures and Assistance Transactions, Number of Institutions, United States and Other Areas, 1934-

2009; FDIC, History of the Eighties: Lessons for the Future, Volume 1, p. 445. 16. Additionally, as in the recent financial crisis, the FDIC Deposit Insurance Fund 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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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 extend to Wachovia Bank, N.A. in September 2008, as described below: ®

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 banks."

'"

13

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


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

12 13

14

15 16

Comments ofe. Todd Conover, Comptroller of the Currency, Inquiry, p. 287. Comments of Chairman st. Germain on FDIC examination reports, Inquiry, p. 396. Inquiry, p. 444. Inquiry, p. 446. Dugger was the Deputy Staff Director of the Subcommittee. Inquiry, pp. 455 - 456.

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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

this :it;, day of November 2009 in Ashburn, Virginia. .

'?'.

V/-~,

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Vern McKinley

"-_./

17 18

19

Inquiry, p. 471. Inquiry, pp. 522- 523. InqUiry, pp. 577 - 581.

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EXHIBIT A TO DECLARATION OF VERN MCKINLEY

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RE: FDIC FOIA Log No. 08-0889 From: "Sussman, Jerry" < To: "McKinley Vern" <' . Cc: "Fisch, Fredrick L," <

Good morning, Mr, McKinley: 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. In our final response to your request, made by Supervisory Counsel Fredrick L. Fisch's letter of January 13, 2009, we stated that your request had been clarified during your December 18, 2008, telephone conversation with me. Vou now have advised that you believe that we spoke on or about December 5, 2008, and that, on December 18, 2008, you received a telephone message from me. However, you further advised that you were on a trip on December 18, 2008, and therefore, were not available to speak to me on that date. You asked, therefore, that I clarify the timing of our conversations. 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. My recollection is that you and I thereafter spoke again to further clarify the scope of your FOIA request. Though I do not expressly recall the date of our subsequent telephone conversations, I note that my January 5, 2009, electronic mail message to you begins by stating, "This is in response to your electronic mail message of November 18, 2008, as clarified during our December 18, 2008, telephone conversation" * *." Thereafter, you and I forwarded and re-forwarded my January 5, 2009, electroniC mail message. I do not believe that any of our messages suggested that the January 5, 2009, reference to the December 18, 2008, telephone conversation was incorrect. Therefore, our final response incorporated the referenceto our December 18, 2008, telephone

Tuesday, January 27, 2009 8:03 AM

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conversation. Given the substantial administrative record, it is conceivable that my earlier reference to December 18, 2008, may have been incorrect. However, while I cannot now categorically confirm whether we did or did not speak by telephone on December 18, 2008, I can confirm that the administrative record reflects that I left a telephone message for you on that date, that my January 5, 2009, electronic mail message confirmed that we spoke on December 18, 2008, and that I am not aware that we earlier received advice from you that the reference to our December 18, 2008, telephone conversation was incorrect.

I hope that this satisfactorily addresses your concerns. Please feel free to call me if you would like to further discuss. Sincerely, Jerry Sussman, Senior FOIA Specialist FOIAIPrivacy Act Group - Legal Division Federal Deposit Insurance Corporation 550 17th Street, N.W., MB-2108 Washington, D.C. 20429 Telephone: Email: -----0 rig Inal Message----From: McKinley Vern [mailto: , Sent: Monday, January 26, 20094:47 PM To: Sussman, Jerry Subject: RE: FDIC FOIA Log No. 08-0889 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. What I recall happened was we talked in early December (approximately December 5) before my trip and you noted that I would likely receive a response by December 12 which was roughly the period of the 21 day response. Then I believe on December 18 or about that time I received a phone message from you. I can review my emails to piece together the timing if needed but if you have a log you can consult to clarify that would probably be easier. If you could clarify the timing of these discussions I would appreciate it. Thanks, Vern