The Supreme Court ruled 7 to 2 yesterday that the Federal Reserve Board can block formation of a bank holding company "solely on grounds of financial or managerial unsoundness," even if the unsoundness wouldn't be "carsed or exacerbated by the proposed transaction."
The ruling is compelled by the language and legislative history of the Bank Holding Company Act of 1956, the Fed's construction of its mandate, and the acquiescence of Congress in the Fed's interpretation, Justice Thurgood Marshall wrote for the court.
Marshall said that the majority "is influenced by the principle that courts should defer to an agency's construction of its own statutory mandate, particularly when that construction accords with well-established congressional goals."
In the dissedting opinion, however, Justice Juhn Paul Stevens, joined by Justice Wiliam H. Rehnquist, protested that the decision "rests entirely on "the principle that courts should defer...'" Stevens added:
"I would not allow this agency, no natter how well respected and how well motivated, to construe vague statutory language as conferring such wide ranging power on itself."
The language particularly at issue is a sentence saying: "In every case, the board shall take into consideration the financial and managerial resources and future prospects of the company or companies and the banks concerned, and the convenience and needs of the community to be served."
The case concerned the First National Bank of Lincolnwood, Ill. Four individuals hold 86 percent of its stock in a voting trust. To make it possible to file a consolidated tax return that would realize substantial tax savings, they created the First Lincolnwood Corp. to serve as a bank holding company.
The four owners planned to exchange their stock in the bank for stock in the holding company. They also planned to have the company acquire a $3.7 million debt they had incurred in acquiring control of the bank from a former chairman and president of the bank who had been indicted for securities fraud.
The owners intended to use dividends from the bank's stock to retire the debt over a 12-year period.
The law required submission of the holding-company proposal to the Fed. The Chicago Reserve Bank, finding the probems offset by favorable earnings prospects and strong management, approved. But the Comptroller of the Currency said that unless the bank's capital position was strengthened, the application should be denied.
As a result, the application was modified in ways that led the comptroller to recommend approval. Nevertheless, the Federal Reserve Board's staff urged denial, and the board accepted the recommendation.