More and more, the financial condition of the nation's banks is colored olive drab. It is neither red nor black, but government-issue green.

Depositors are government insured, of course, up to the legal ceiling, and have been since 1933. (If the Great Society caused Los Angeles riots of 1992, maybe the New Deal caused the Wall Street riots of 1986-1989. It is an idea for the Bush administration to run up the flagpole.)

What is new, even allowing for the recession, is the rising proportion of banking assets that are either government issued or government insured: Treasury securities, guaranteed mortgages, mortgage-backed securities, and the rest.

As Democrats began the socialization of the liability side of the banking system's balance sheet, so Republicans have pioneered in the socialization of assets. It is partnership in good government.

The New Art of Banking

Almost universally, Wall Street analysts have applauded recent developments. Banks, they say, have virtually become leveraged bond funds. the art of banking has become the art of buying Ginnie Maes of three-year notes with the proceeds of low-cost deposits. Starting with the five-year note, government yields, at 6.6%, top the prime rate, at 6.5%

In the American Banker recently, commentator Sanford Rose contended that the after-tax return on a loan, after taking into account the costs of over-head, administration, and credit loss, is negligible: He guessed that it may amount to less than six-tenths of 1%. If so, the preference for Treasury paper seems not merely understandable, but commendable.

Or is it? On reflection, we think it is not.

In return for the nationalization of risk and the heavy subsidy of reward, the authorities have demanded a measure of reciprocity.

Merger Extortion

To date, the tangible cost of compliance has been small. But the demands for socially sanctioned credit are rising. The future of banking seems less and less like the kind of business to which forward-looking investor would assign a high multiple.

Post-Los Angeles, discriminatory lending has moved up on the government's problem list.

Enlisting in the campaign to stamp out discrimination with borrowed money are the Justice Department and a variety of other agencies.

Lenders must reach out the marginal borrower under the Community Reinvestment Act. The amount of required lending is small, but the disclosure burden is great. Bankers also must conform to the provisions of the Equal Credit Opportunity Act, the Fair Housing Act, and the Home Mortgage Disclosure Act.

Big banks, to effect a merger, must pay tribute to the government with multibillion-dollar pledges of "community" lending. For instance, for the dubious privilege of acquiring Security Pacific, BankAmerica committed to lend $12 billion over the next 10 years to the people to whom bankers do not ordinarily lend, including $7.5 billion in home loans in areas where bankers do not ordinarily live.

Possibly, an investment in the Neighborhood Advantage program may ne no worse than one in Security Pacific common. Still, the precedent is a worry.

If, under a Bush administration, the government can extort $1 billion a year per merged institution, why couldn't a Clinton administration (or a Jackson or a Perot administration) get $2 billion or $3 billion?

"In the past year," a team of lawyers with Wachtell, Lipton, Rosen & Katz recently wrote, "the Federal Reserve for the first time denied a merger application on CRA grounds. The stringency of on-site CRA examinations has also been increasing.

"Despite (or perhaps because of) claims by community groups that the regulators have been too lenient, many banks have received significant (though perhaps selective) criticism of their CRA efforts in their most recent examinations."

Bad Bargain Deteriorates

It will be said that banks long ago made their pact with the federals. The government has chartered national banks since 1864, and the Federal Reserve System has facilitated the leveraged acquisition of Treasury securities almost since its founding in 1914.

In return for subsidies, steep yield curves, and monopolistic rule making, the governments has oppressed the banks with regulations and restricted their freedom of action. It was never much of a bargain, but now, it seems to us, the terms are getting worse. To be filed under the heading: "Warnings: distant and early."

Mr. Grant is editor of Grant's Interest Rate Observer, which is published every other week. This article is reprinted from the June 5 issue. Mr. Grant's latest book, "Money of the Mind: Borrowing and Leading in America from the Civil War to Michael Milken," was published last week by Farrar, Straus & Giroux.

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