1989

FDIC Oversight of Thrifts and Banks Questioned

WASHINGTON, Nov. 17 — Concerned about the government's increasing exposure to losses on deposit insurance, Rep. John Dingell on Thursday questioned the decision to give the Federal Deposit Insurance Corp. responsibility for both banks and thrifts.

"Although we are assured that the FDIC is in relatively better shape [than the Federal Savings and Loan Insurance Corp.] and will not require a tax bailout in the near future, I am not overwhelmed with these assurances," said the powerful chairman of the House Energy and Commerce Committee, at a hearing on government guarantees.

The Michigan Democrat expressed concern that the amount of deposits insured by the government had soared to $2.7 trillion, according to figures released Thursday by the General Accounting Office. Insured deposits account for 54% of the $5 trillion in government guarantees. Other guarantees include direct loans and guarantees on third-party loans and securities. The $5 trillion total is more than 11 times the 1965 total of $438 billion.

Rep. Dingell questioned the FDIC's ability to adequately protect the government given the scope of its expanded duties. The FSLIC was shut down in August with the $157 billion thrift-bailout law. It was replaced by the Savings Association Insurance Fund, which was handed to the FDIC to manage.

Mr. Dingell said Congress' willingness to give broader power to the FDIC seemed to be "based on the questionable assumption that the FDIC is better-managed than the FSLIC."

"We never said that," FDIC Chairman L. William Seidman said in an interview Thursday. "I think the banking industry is in better shape than the S&L industry was."

"As the FDIC examiners pick up a major part of the savings and loan responsibilities, the result will be less examination, enforcement, and oversight of the banking system," Mr. Dingell said.

FDIC spokesman Alan Whitney denied that the FDIC was cutting back its supervision of the banking industry.

"We'd be happy to share with Chairman Dingell specific information on our plans to maintain and actually increase our supervisory resources," he said. "Even with the added workload, the number of examinations has not been reduced."

Comptroller General Charles A. Bowsher, who heads the General Accounting Office, told Energy and Commerce's oversight and investigations subcommittee that deposit insurance for the bank and thrift industries, managed by the FDIC, totaled $2.57 trillion as of Sept. 30, 1988, the most recent fiscal-year data available. Insured deposits at credit unions, managed by the National Credit Union Administration, totaled $157 billion. The GAO is an investigative arm of Congress.

Mr. Dingell also targeted the accounting industry.

"As with FSLIC, we are depending on the same accounting firms which failed miserably in finding fraud in the savings and loan industry and on regulators whose resources are stretched well beyond any reasonable limit," he said.

1909

Feeling Threatened by a Postal Savings Bank

April 17 — While the inaugural address of President Taft was received throughout the country with many expressions of praise it is greatly to be regretted that he took occasion to endorse the Postal Savings Bank theory. It is easy to see that he as induced to make a reference to Postal Savings Banks by reason of the fact that the platform upon which he has been elected contained a plank endorsing such a system. President Taft's statement is as follows:

"The incoming Congress should promptly fulfill the promises of the Republican platform and pass a proper Postal Savings Bank bill. It will not be unwise or unsafe paternalism. The promise to repay by the Government will furnish an inducement to savings deposits which private enterprise can not supply and at such a low rate of interest as not to withdraw custom from existing banks. It will substantially increase the funds available for investment as capital in a useful enterprise. It will furnish an absolute security which makes the proposed scheme of Government guaranty of deposits so alluring without its pernicious results."

This argument is simply a restatement of ex-Postmaster-General Meyer's argument, who is now Secretary of the Navy. This fallacy has been exposed a number of times. There is not the slightest ground to suppose that Postal Savings Banks would induce any material amount of deposits that would not otherwise have gone into existing banks. All arguments in favor of the Postal Savings Bank system presuppose either a dangerous or unsafe condition of existing banks, or a lack of savings banks to meet the wants of the people. That the first of these two propositions is absolutely incorrect is shown by the fact that losses through failures of savings banks throughout the United States have been so infinitesimally small as to scarcely warrant mention. In comparison with all other classes of business the loss from savings banks of the country are of no concern whatever.

That the second proposition has no force has been simply demonstrated in the splendid address of Lucius Teter, president of the Chicago Savings Bank, and ex-member of the Savings Bank Section of the American Bankers' Association, wherein he demonstrated that instead of there being some 1,200 or 1,300 savings banks in the United States, as claimed by ex-Postmaster-General Meyer in his report to Congress with some $3,500,000,000 deposits, fully two-thirds of the active banks in the country, or nearly 15,000 banks transact a regular savings business, and that the savings deposits of the country are nearly $7,000,000,000, or almost double the figures fixed by the Postmaster-General. It is evident, however, that there is danger of such a bill passing Congress, unless the bankers' associations of the United States keep up an active campaign of education on the subject.

The question should have a place on the program of every bankers' convention during the year, and earnest resolutions should be adopted protesting against the passage of such legislation in Congress. A very important question has lately been raised as to whether legislation authorizing the establishment of a system of Postal Savings Banks would be constitutional. The Constitution of the United States conferred upon Congress the right to establish post offices and post roads. At the time the Constitution was adopted there was not a Postal Savings Bank in existence in any place in the then known world. It is ridiculous to suppose that the framers of the Constitution had the slightest idea when they conferred upon Congress the power to establish postoffices [sic] and post roads that they were thereby authorizing Congress to establish a system of banks, or authorized the Government of the United States to enter into a banking business with some 60,000 or 70,000 branch banks. The establishment of post offices and post roads was conferred upon Congress because it was evidently absolutely essential that letters should be sent from one State to another, and the framers of the Constitution saw how inconvenient it would be to have each State provide its postal regulations, they therefore withdrew from the States the power to establish post offices and post roads and conferred it absolutely upon Congress.

Guaranteeing Bank Deposits

Senator Bristow, of Kansas, in a letter to the Wall Street Journal explains and defends the Kansas Guaranty Law. He points out that a bank must be in operation a year before eligible; must be certified in first class condition by a bank examiner; is assessed 1-20 of 1 per cent of deposits, or so much as necessary to maintain the Association's funds at $50,000.

In addition, it must put up a $500 bond for every $100,000 deposit, as a pledge to pay assessments; interest on these bonds goes to the bank. If a bank fails, a receiver is appointed by the bank commissioner, who issues to each depositor a certificate of indebtedness at the legal interest rate, and winds up affairs. Any difference between assets and liabilities is paid from the guaranty fund.

Any time a bank violates State law or departs from sound banking the bank commissioner may wind up its affairs. Assessments are limited to not over five in one year, making the maximum ¼ of 1 per cent. Statistics in Kansas show such assessments are ample. "It cannot be justly said that this is visionary or unjust. It is the same as any other kind of mutual insurance, only it is much safer than life insurance. The necessity for insurance of deposits is the same as that for all other kinds of insurance. A bank failure in a small community is a calamity to that community; and when it can be protected at small expense, isn't it good judgment to give such protection?"

The Wall Street Journal replies, in part: "The Oklahoma guaranty is a premium on bad banking. Senator Bristow shows that the Kansas Law is a humbug. The theoretical safeguards are such that no guaranty should be needed. There is no sense in providing crutches for a man possessing full use of his limbs.

One year is not long enough to decide whether a new bank should enjoy protection at expense of older ones — not long enough to keep out amateur and speculative bankers. The law taxes well-managed banks to protect badly-managed, and in spite of safeguards this fatal defect of any deposit guaranty remains a source of danger.

The depositor is not paid in cash, but received a "certificate of indebtedness." A financial crisis in Kansas brought about by reckless banking fostered by the guaranty would mean suspension of many banks, and the certificate would be simply a form of depreciated currency.

As the law stands, it is aimed more at protecting the banker than the depositor; and it protects only a class of banks which have no right in that business at all.

1900

Banks Set Out to Sway Court of Public Opinion

Oct. 10 — It will not be necessary to discuss at any length with this convention of practical bankers the merit in favorable public opinion of the individual banking institution. We may presume that without exception bankers realize the importance of public confidence as it relates to the solvency and management of the particular corporation.

The banker holds the integrity of his institution inviolate, knowing favorable public opinion is part of his stock in trade, without which the monetary capital might as well not have been invested.

When the good opinion of the public is superseded by distrust of the bank or the probity of officers or directors, its career as a commercial factor is terminated with an abrupt slam of the doors; the examiner reigns supreme in silent halls where speculation or careless investment have brought woe to the once proud financier, who must sit, crushed and humiliated, amid the ruins of unprofitable assets, like Grief upon a monument, looking at Despair.

I wish to ask your consideration of a subject equally as important, but not as universally and diligently followed, and that is, public opinion of banking as a business or profession — public opinion of the bank in the abstract; a subject regarded by this Association, however, as of such vital importance that a competent committee has been intrusted with the duty of enlightening the general public upon the functions and uses of banks, to the end that any ideas of mystery in the purposes and aims of banking institutions may be dissipated in the light of reason and understanding; that their practical benefits in the handling of credits, in the economical direction of capital into proper commercial channels, in the enlargement of its use through system and consequent benefit to all the people, may be understood and recognized.

No more important work was ever undertaken in the history of this Association, and I trust the efforts of the Bureau of Education may be so prolific of good results and that infallible antidote for prejudice labeled "Education" may be administered by "Doctor" Cornwell and his eminent staff of trained nurses in such heroic doses that in time even the good-natured old hat money skeptic may begin to see in the modern banking institution — transacting daily an amount of business without the use of actual money which, if performed by coin or its paper substitute, would make his wildest dreams of "per capita" look like the proverbial "thirty cents" — a real benefit, convenience and necessity to business interests; and then, perchance, "His silver hairs will purchase us a good opinion, and buy men's voices to commend our deeds!"

Public opinion today is the predominant, governing influence; it directs all interests, commercial or otherwise; its depression is the voice of the people, its approval the charter of success, its support invaluable.

This is likewise an age of materialism, in which commercial interests often dominate in the settlement of great public questions; influence the destinies of nations, and even threaten to partition territory and to move emperors and kings at will upon the chessboard of diplomacy.

Without considering the questions of sentiment or morals involved in the general strenuous advancement of things mercantile, it is evident that the caprice of rulers, the differences of religion and race, the lust for mere authority over men, which for centuries have inspired the course of events, are now subserved in great measure to the accumulation of corporeal property; and with commercial interests such an important factor, and public opinion such a puissance in our present civilization, we find antagonism between these components, the people's will. "The manifestation of public interests" looks askance at the growing energy of commercialism, and controversies arise as to methods by which trade and commerce are carried on or expanded.

The bank, being an important complement of trade and commerce, seems to have been selected as the scapegoat upon whose devoted head are unloaded the anathemas of those who have positive ideas upon financial and commercial questions, ranging from the economic policy of adhering to an enlightened monetary standard to the political expediency of combinations of capital.

It would seem only fair that there should be a difference of deduction by the popular mind as to the extent of the bank's responsibility; but it is often the case that the only agreement reached by champions of different financial schools — the devotee at the shrine of government fiat or ardent disciple of sacred ratio — is that in some occult, psychic manner the banks profit through public distress, and that their healthy growth bodes no good to the commonwealth.

Prejudice has been called "The great obstacle to progress." The prejudice against the banking business is not confined altogether to the ignorant, the worthless or the constitutional specialists in philippic, and while more pronounced in certain localities, can yet be called widespread. I do not, by any means, infer that it is universal, representative or increasing, and am glad to believe the majority of intelligent citizens this year of grace and prosperity appreciate the benefits of banks and respect those engaged in the business; but we do not have to seek far in any locality to find traces of a misjudgment which we know to be artificial, wrong and uncalled for.

It is not exaggeration to say there are those in every community who believe the banker a financial despot, whose mandate is potent to cause bankruptcy; who believe the banker chuckles in unholy glee in times of panic and business depression — going forth like a black-winged cormorant to devour the farm, the cottage or the succulent collateral tid-bit. And these same wiseacres picture the banker turning his attention to the national calamity business when the supply of individual victims runs short — buying up the people's representatives in the interest of pernicious legislation, or getting up panics to satisfy the bankers' well known love of excitement (?), or meeting in conventions, as has been said, to consider what shall be done, who shall be done, and how we shall do them!

Whether the bigotry of a benighted minority is influencing public opinion to further unjust legislation derogaroty to banking interests, and as must ever be the consequence, to the injury of general business interests; or whether the better judgment of the people through education as to the conduct and uses of banking institutions is gaining the ascendancy, is a question of interest and its solution "a consummation devoutly to be wish't," especially to bankers whose business interests are established in localities where such remarkable financial theories are propagated.

Certainly there is nothing in the history of banking in this country to justify much prejudice. The banks have always been a power for good in the community when honestly managed, and every banker of experience has known sleepless nights trying to work out the salvation of his customer and at the same time fulfill his duty in the preservation of his sacred trust as a public custodian.

The bank merits favorable public opinion in the light of history. The names of patriotic bankers who pledged their will in the cause of freedom and the rights of man for which our forefathers shed their blood are graven in the hearts of true Americans in letters that can never fade. The noble declaration on which the colonists built their hopes and consecrated their lives in the cause of liberty, bears the bankers' signature, and its principles today bear the bankers' indorsement.

Government bonds, selling at a premium which establishes the credit of our country above any nation of the world; the issues suggested, subscriptions made through and encouraged by bankers of the whole republic in substantial amplitude; a safe currency system; a stable standard; a people progressing in financial knowledge largely through the earnest and untiring efforts of bankers in educating them upon a subject they are well qualified to teach — these are a few answers to distorted public opinion which can hold the banker lacking in civic pride.

The banking institution is the heart of the industry, and to its throb responsive, the energy and ingenuity of man is stimulated and the boundless resources of our country made available to mankind; the magic touch of husbandry is rewarded in bounteous store; the eternal hills yield wealth, emoluments to industry and skill, the furnace fires burn brightly, the wheels of traffic turn, the song of prosperity chords with the "busy hum of men," when to that heart untrammeled flow the capital and savings of the community with confidence and trust to be again projected through the channels of industry to build anew the tissues of commerce.

That banks may gain and hold public approval it is necessary that the men who conduct them should by deed and action be worthy of it. The banker must be something more to his country and his community than a loan agent and merchant of exchange. He should be of broader caliber; one who can subserve the growing demands of trade and commerce and keep in sympathy with business progress. His training and practice should lead him to understand in times of prosperity the music of traffic; the rumble of wheels, the rasp of the saw, the hum of spindle and melody of anvil; as well as to warn him against inflated values, speculation and the omens of depression and panic. He should be a man of sense, backed by unfailing nerve, as ready to encourage sound enterprise as to turn down the watered stock expert and the genius of boom real estate ventures.

So far as prejudice has its foundation in the human instinct which leads certain of the unsuccessful to rail at prosperity of others, there is no remedy, except, perhaps, in a moral regeneration. The bankers, though he be only moderately burdened with wealth, or not burdened at all in that respect, must expect to be the target for the "arrows and slings" of those who regard wealth as a crime — so long as someone else has it.

The prejudice of the unsuccessful borrower cannot be altogether remedied, but those individuals not entitled to credit who have been refused it with the simple statement that the bank would not be justified in making the loan, are less virulent than those who have been put off with one of the stock excuses. Nine times out of ten the applicant knows if it you qualify your refusal. A good banker is never successful as a prevaricator — his frank and open countenance should invite trust and his words carry conviction.

Likewise prejudice must exist in some degree while men mistake their calling and engage in banking when they are better qualified for usurers, promoters or speculators — the last named qualification being particularly and justly calculated to bring down the righteous wrath of the public. Banking is not a "get rich quick" profession and the science of futures, stock margins and gold brick enterprise can be studied only sufficiently to be recognized and avoided. The percentage of those who are not representative and who bring no credit to the profession is fortunately small.

We must recognize the fact that the public has been exercised about the corporations, it being a popular theory that the corporation thrives at the expense of the individual. They have brought the regular scapegoat, the bank, into their antagonism to corporations, hopelessly confused the corporation with the trust and capped the climax by calling the National bank the greatest trust of all. It has been suggested that in view of this, any five men in the rural districts owning $5,000 each can buy a trust — the new currency bill makes them cheap at $25,000 — marked down from fifty.

The chief objection to the National bank has its foundation in the idea that the circulation feature gives these institutions an advantage over other people. It is difficult for many to understand the slight profit in National bank circulation, and while I would not attempt to bring in here the question of bank currency, I firmly believe that when a sound and scientific bank currency is possible, the immense benefits derived from an elastic system will be so apparent that public opinion will approve such issues more readily than the present National bank circulation.

Dignity has had something to do with a mild expression of unfavorable opinion of the banking business. The profession carries with it a certain commercial dignity, and the banker has been referred to as the haughtiest of business men — doing business on other people's money. The banker, naturally a very busy man, is often inclined to smile at criticism, and, with an air of superior wisdom, knowing the justice of his cause, pass the subject and go ahead making loans or getting his mail off. If possible to conduct the business with just deference to honestly expressed public feeling that golden returns in increased public esteem can be attained, bankers should be willing to devote time and effort toward that end.

What country banker, for instance, has not heard the honest farmer of intelligence and integrity, whose note is good to the legal limit and who personally respects and trusts the banker implicitly, make some reference to the enormously profitable business of banking as compared with returns obtained from tilling the soil? Many a banker has had such a customer, whose profits and wealth would compare favorably with his banking institution, talk to him as if he were a trust magnate. And how do the bankers meet his inference? Why, we smile and smile, many of us, and he may continue to think us "villains still;" change the subject, talk crops or weather, when it would take but a simple explanation, a few statistics to convince him that bank capital in the aggregate gives only the most moderate returns on the investment.

Whoever hear of a man getting rich at the banking business? I mean starting at the foot of the ladder and acquiring wealth in that manner. It's a nice business after you have accumulated wealth in some other department of commerce, in which to invest surplus capital with safety and fair profit; but did you ever hear of a young man, who becomes a millionaire in the approved style, starting life on a farm, studying by the light of a tallow dip, and coming to the city with forty-five cents and a ham sandwich — whoever heard of his going into the banking business and getting to be a railroad owner? No; he must first accumulate his fortune by sweeping out the office of his future partner at seven dollars a month, and then when he is gray headed, gouty and wealthy, then it is time for him to embark in the banking business and dodge missiles hurled by people who do not own bank stock.

To a greater extent this sentiment of prejudice is entirely artificial, and has in substantial measure been caused by those who would seek political preferment by appealing to the passions of the discontented; men who would seize an opportunity to foment the inherent antagonism, deep rooted, in certain individuals toward acquired capital, just as readily as they have been known to open old sores, political or sectional, promoting social strife to attain personal ends, and we need not wonder they can picture the banker a marble hearted coupon clipper, whose profits are wrung from those they are pleased to style "the masses."

Public opinion will still regard the bank as the agent of the money power, and the bank cheerfully assumes the duties of that great trust. It is not the green eyed dragon of Lombard or Wall Streets, but a power existing in the homes of a people who have by diligence and industry accumulated a competence and invested it in the banks and savings institutions of the country; the people who own the deposits, who are largely interested in the stock of these institutions; people who will demand their savings or wages in money of equal purchasing power commanded when invested or labored for. This is the money power that employs the bank as its agent, and it is not only powerful in capital and influence, but in the expression of public opinion a power greater than imperial despots wield; a power placed in the hand of the American citizen in this day of the grandest civilization the world has yet seen, as he stands in the ballot booth along with conscience and his God and registers his honest conviction and will, with

"A weapon that comes down as still

As snowflakes fall upon the sod,

But executes the freeman's will

As lightning does the will of God."

The public is rapidly coming to realize that the bank has no designs upon the Government; no diabolical plots for the financial enslavement of the people; but that its interests are identical with the interests of the people; it prospers only when they prosper.

And although public opinion has been busy with the bank ever since the "money question" and the complex problem of coinage were dragged into the political arena, where they do not belong, and the banker, much against his will, forced into prominence as something of an issue himself. Still, bankers have no political axes to grind. As bankers, they belong to no party, but are ever ready to hold the good name and integrity of Government above all party affiliations when its credit is assaulted.

In this day, when our country stands the peer of any world power, a creditor nation whose banking interests, the infallible barometer of business prosperity, indicate such commercial progress that the gold eagle is soon to speak a language that every country can recognize and understand as well as the pound sterling of Great Britain; when the "Old Lady of Threadneedle Street" looks across the Atlantic for gold to strengthen the financial sinews of the British Empire; when Imperial Germany and Mighty Russia follow the sun of commercial supremacy westward to our shores to replenish war chests from our abundant store; the bankers of the Republic, with hope for its progress onward toward the bright and shining star of destiny, proud of its high seat in the world's congress as the arbiter of nations, will continue to fulfill their duty, help maintain the credit, and further the prosperity of their country and, with patience, await the reward of popular approval.