Top Court Backs Fed in MCorp Dispute

A Supreme Court decision on Tuesday backed the Federal Reserve in forcing MCorp to prop up ailing subsidiary banks.

The high court found unanimously that the federal district court did not have legal jurisdiction to rule that the Fed lacked this authority over MCorp.

Tuesday's decision still leaves up in the air the legality of the Fed's controversial "source of strength" doctrine, which requires a bank holding company to "serve as a source of financial and managerial strength to its subsidiary banks."

The Fed cited the regulation in an October 1988 administrative proceeding against Dallas-based MCorp, then the second-largest bank holding company in Texas with more than $21 billion in assets.

The action was part of the Fed's effort to force MCorp to provide capital to its subsidiaries, 20 of which were seized by regulators in 1989.

After filing for bankruptcy, MCorp sued the Fed to stay the agency's administrative proceedings. A district court ruled in MCorp's favor in July 1989, leading to the Fed's appeal.

Howard M. Cayne, an attorney with Arnold & Porter who is representing MCorp, said the narrow ruling "does nothing whatever to resurrect the Fed's self-proclaimed source-of-strength authority."

The next move is up to the Fed. It must decide whether to proceed with administrative actions against MCorp, which currently has only one solvent subsidiary, MBank New Braunfels, with about $68 million in assets.

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