Where Does New York State Get the Power To Seize Signature Bank? 

It’s hardly an academic question. It goes to the heart of property rights and capitalism in America.

AP/Eric Risberg
A former Massachusetts congressman, Barney Frank, in a June 29, 2014, file photo. AP/Eric Risberg

Where in the world did the government of New York get the power to take Signature Bank away from the bank’s shareholders and from the management who had worked for years to build it into the formidable institution that it was?

It’s hardly an academic question. The Fifth Amendment of the Constitution states that no person shall be “deprived of life, liberty, or property, without due process of law; nor shall private property be taken for public use, without just compensation.”

The constitution of New York state has similar language: “private property shall not be taken for public use without just compensation.” Yet depriving the bank shareholders of their property — without due process and without just compensation — appears to be precisely what Governor Hochul did in respect of  Signature Bank. 

The state’s superintendent of financial services, Adrienne Harris, said, in announcing her decision, that she had taken possession of the bank “pursuant to section 606 of New York Banking Law.” That law gives 10 possible justifications for such an action:

“The superintendent,” it says, “may, in his discretion, forthwith take possession of the business and property of any banking organization whenever it shall appear that such banking organization …

  1. Has violated any law;

    (b) Is conducting its business in an unauthorized or unsafe manner;

    (c) Is in an unsound or unsafe condition to transact its business;

    (d) Cannot with safety and expediency continue business;

    (e) Has an impairment of its capital; or, in the case of a mutual
    savings and loan association or credit union, has assets insufficient to
    pay its debts and the amount due members upon their shares;

    (f) Has suspended payment of its obligations; or, in the case of a
    mutual savings and loan association, has failed for sixty days after a
    withdrawal application has been filed with it by any shareholder to pay
    such withdrawal application in full;

    (g) Has neglected or refused to comply with the terms of a duly issued
    order of the superintendent;

    (h) Has refused, upon proper demand, to submit its records and affairs
    for inspection to an examiner of the department;

    (i) Has refused to be examined upon oath regarding its affairs.

    (j) Has neglected, refused or failed to take or continue proceedings
    for voluntary liquidation in accordance with any of the provisions of
    this chapter.”

Which of the 10 causes of action, if any, applies in the case of Signature Bank? So far as I can tell, the governor hasn’t said. Neither has President Biden, nor Superintendent Harris.

In a news conference Monday, Governor Hochul uttered some words about how “our view was to make sure that the entire banking community here in New York was stable, that we can project calm.” Enabling the governor to “project calm” is not one of the 10 justifications listed in Section 606. Neither is there, in Section 606, any language about “the entire banking community.”

A former congressman, Barney Frank, acting as an independent director of the bank, signed a March 9, 2023. letter. The attached proxy statement listed him as owning 5,542 shares of stock in the bank. At the bank’s recent high of $328.88 a share that would have been worth $1,822,652.96. If the shares go to zero, it would be worth zero.

In interviews, Mr. Frank has been suggesting that the government seizure was unnecessary. “I think that if we’d been allowed to open tomorrow, that we could’ve continued — we have a solid loan book, we’re the biggest lender in New York City under the low-income housing tax credit,” Mr. Frank told Bloomberg News late Sunday night. “I think the bank could’ve been a going concern.”

On Monday, Mr. Frank told Bloomberg radio that the regulators “wanted to send a message to get people away from crypto.” Mr. Frank said, “We were singled out to be the poster child for that message.” Sending a message “to get people away from crypto” is another reason that is not listed among the 10 in Section 606 of the New York State banking law.

The New York Times paraphrased Mr. Frank as saying that “the bank was the victim of overzealous regulators.” “We were the ones who[m] they shot to encourage others to stay away from crypto,” Mr. Frank told the Times.

There’s plenty of recent history of New York financial institutions being pushed under by regulators in a panic, with the property rights of shareholders trampled and the rule of law violated — in a way that benefits the competitors of the crushed institution. Remember AIG? Some Signature Bank competitor now has the opportunity to raid its customers or purchase its assets or businesses at artificially depressed prices. 

The FDIC press release about Signature noted that at year end of 2022, the bank had assets of $110.4 billion and deposits of $82.6 billion. That was a healthy capital cushion of $27.8 billion. If there were any liquidity concerns, the standard move for regulators would be to provide liquidity against those assets, not to take the bank away from its owners. Why would anyone invest in a New York bank knowing that regulators could move in and take it away?

On Monday morning, President Biden boasted: “the management of these banks will be fired. If the bank is taken over by FDIC, the people running the bank should not work there anymore. … Investors in the banks will not be protected. They knowingly took a risk and when the risk didn’t pay off, investors lose their money. That’s how capitalism works.”

Mr. Biden struck me as a little too gleeful about all that. It’s one thing for a company to go out of business. It’s another thing for a company to be taken over by the government without a clear or lawful explanation and for one of the company’s directors to be out there publicly maintaining that the bank could have been a going concern but for the regulator’s decision to single it out. 

That’s not capitalism. It starts to look like the sort of anti-capitalist hostility to free enterprise that, sadly, has come to characterize so much of Mr. Biden’s arbitrary regulatory regime. 


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