Twice in one week the Federal Deposit Insurance Corp. Improvement Act - talk about the need for Truth-in-Labeling - reared its ugly head.
The first time was when a reporter asked my views of the law on the eve of its fifth anniversary.
The second was when Paul Horvitz, chair of banking and finance at the University of Houston, sent me a piece he had written on this law.
Mr. Horvitz's letter said he had recently come across a 1989 story in the American Banker in which I had predicted that the Bank Insurance Fund would reach 1.25% of insured deposits by 1995. Mr. Horvitz went on to say: "That was pretty impressive forecasting, particularly if one remembers the situation when it was made."
I looked up the American Banker article, which reported a study done by my colleague Jim Marino and me. Our study responded to one by Dan Brumbaugh, Robert Litan, and Andrew Carron. (Mr. Brumbaugh, you may recall, predicted - incorrectly - on ABC's "Nightline" that some very large banks would fail, and named them.)
The Brumbaugh-Litan-Carron study, we pointed out, was far too pessimistic. It overstated the likely losses of the Bank Insurance Fund and understated its future income.
The flaws in that study paled in comparison to studies by others that followed. The "my loss number can top your number" mania reached its zenith in 1991. The Washington Post published a study declaring that the Federal Deposit Insurance Corp. was insolvent by more than $100 billion.
It's important to remember the climate of hysteria about banks that existed in the late 1980s and early 1990s. It led to a gross over-reaction by government policymakers in a number of ways, adoption of FDIC Improvement Act being the most egregious.
The U.S. will once again experience serious banking problems. When we do, this law, which requires a by-the-numbers approach to supervision, will be a serious obstacle to resolving them.
The act would have made it enormously more difficult and expensive to cope with at least two of the threats to the banking system in the 1980s. Thankfully, we have not yet compounded the mistake by adopting full "mark- to-market" accounting, as the act's proponents would have us do.
If its "early intervention" rules had forced the FDIC to close all of the marginal savings banks in the period of skyrocketing interest rates in the early 1980s, the losses would have exceeded $100 billion.
Instead, the FDIC was able to use good judgment. It shut down the savings banks that were beyond repair and supervised very closely those that might be able to recover in a lower interest rate climate. The total cost to the FDIC of the savings bank cleanup was roughly $2 billion.
I shudder to think what might have happened to the banking system had the 1991 law forced the regulators to confront substantially more aggressively the LDC debt problems in the mid-1980s. Several money-center banks would have been rendered insolvent.
One could argue that the regulators should not have allowed the LDC debt problem to develop. One could also argue that the regulators should have required somewhat faster writedowns of the loans once the problems became apparent.
But one cannot argue convincingly that our nation would have been well served by the simultaneous failure of many of its largest banks.
The FDIC Improvement Act would not have prevented the savings bank or LDC debt problems from occurring. Nor would it have caused the regulators to be any more adept at identifying the problems in a timely way. It simply would have made it more difficult and expensive to handle the situations once they were discovered.
We should repeal this law before it causes irreparable damage.
Mr. Isaac, a former chairman of the Federal Deposit Insurance Corp., is chairman and chief executive officer of Secura Group, a financial services consulting firm based in Washington.
