James L. Sexton likes to follow trouble.

When banks and thrifts began to flop in the early 1980s, he was in the thick of it, directing the Federal Deposit Insurance Corp.'s supervision division.

As the trickle of failures became a torrent, Mr. Sexton moved to the crisis' epicenter to run the Texas Banking Department. Three years later he joined the Bracewell & Patterson law firm in Austin, where he helped heal or sell many of the same Lone Star institutions he once regulated.

By the early 1990s the Texas banking scene had mellowed, so Mr. Sexton took his skills abroad, helping Asian and Eastern European governments establish sound banking laws and regulations.

Given his nose for trouble, Mr. Sexton's decision to return to the FDIC at a time of record industry earnings is, on its face at least, somewhat puzzling. Mr. Sexton, 59, rejoined the agency in January, in the same position he held in 1983-director of supervision.

Mr. Sexton says he merely wants to take a final stab at regulation before retiring. "I have always enjoyed bank supervision," he said during a recent interview. "When Chairman (Donna A.) Tanoue was confirmed and posted the position, I just couldn't resist."

Mr. Sexton and Ms. Tanoue bonded during the turbulent mid-1980s, when both were state bank commissioners. Their relationship continued after each left to join the private sector, with Ms. Tanoue, a banking lawyer, once recommending Mr. Sexton as an expert witness.

Ms. Tanoue took the FDIC's helm in May. When resumes began arriving for the supervision slot vacated by Nicholas J. Ketcha, Mr. Sexton's diverse experience stood out.

"He was the most seasoned and the best qualified of the applicants that I interviewed," she said.

Sanford M. Brown, a Bracewell colleague, said the job opening also gave Mr. Sexton an opportunity to expand his government pension. Having begun his FDIC career in 1965 as an assistant examiner in Fort Worth, Mr. Sexton was roughly 18 months shy of the 20-year mark.

But the American public will get the better end of the bargain, according to those who know him well.

"I think the world of Jim Sexton," said William M. Isaac, a former FDIC chairman who hired the Texan as supervision director in 1982. "He believes in broader powers for banks. ... He also believes there's a role for examiners to go in, look at what's going on inside a bank, and take action if the bank is messing around."

When Mr. Sexton showed up for work Jan. 4, he had little time to settle in. The Inspector General's Office presented him with a report criticizing examiners for mishandling a Colorado bank that failed last July. Within 10 days, Mr. Sexton fired back a scathing response, calling the report's methodology "fundamentally and substantially flawed."

"Jim is such a seasoned hand ... that I'm sure he took all of that in stride," Ms. Tanoue said. "I would back his public position 100%."

To quickly get his staff of 2,500 on the same page, Mr. Sexton sent out a three-page, single-spaced memo. It pulled no punches, particularly in his assessment of today's bankers.

"If the herd is scurrying for safety, as in the 1980s, management of the regulatory process is relatively straightforward, if professionally unpleasant," he explained to his staff. But "when the herd responds to stimuli that entice it onto a promontory of risk and, therefore, accepts a narrower margin of error, greater regulatory vigilance" is required.

Mr. Sexton elaborated in an interview. "The issue right now is simply complacency. We had an extraordinary expansion, and banks have performed exceptionally well," he said. But "the banking industry is a riskier place than it has been in the past 25 years.

"We just have to be vigilant and encourage the banks to maintain their guard, document their files, stay within their loan policies, and resist the temptation to compete on the basis of loan policies," he said. "We need to be a constraint in the area of risk-taking."

Like many others monitoring today's banking scene, Mr. Sexton said the banking industry is being buoyed by the strong economy, which has produced low, stable interest rates and modest inflation and unemployment. "Some of us are surprised that things have continued to churn along the way they have," he said.

His greatest concern is that the economy will take a rapid turn for the worse, leaving banks stranded with nonperforming loans.

"Your exposure really exists when you're in an up cycle and you forget to do things to protect yourself for when the down cycle comes," Mr. Sexton said. A bank needs to assume the economy will worsen, not improve, he added.

Moreover, he wrote in the memo, a shortage of "sound, bank-friendly credits" is leading many institutions to "drift into the uncharted regions of so-called 'subprime,' high-loan-to-value lending," even as consumers default on credit card loans and declare bankruptcy in ever higher numbers.

"A bank is committed," he said. "Their money's out there. And if the world changes and borrowers can't pay their debts," they could be in trouble.

Mr. Sexton has seen more than his share of bank carnage over the years, beginning with the savings banks in the Northeast. "There were many a night when Jim Sexton and I ended up spending the night at the FDIC," Mr. Isaac said.

As free-market advocates, the two were opposed to propping up moribund institutions. "When we decided to let Penn Square fail, for example, Jim Sexton was right in there urging that," Mr. Isaac added.

Mr. Sexton saw more of the same in Texas, where he beat out 114 other applicants to become bank commissioner. He is credited with building support for an intrastate branching law and improving the quality and reputation of the state's examiners and exam procedures.

He also established himself as a firm regulator who nevertheless believed in the healing qualities of the free market.

By the time he joined Bracewell & Patterson as its first nonlawyer consultant, Mr. Sexton had built a reputation as soaring as his 6-foot, 7- inch frame.

At Bracewell he parlayed his good name and expertise into a thriving consulting business, representing banks before state and federal regulators, analyzing loan portfolios, and providing expert testimony. He also helped clients bid on failing banks and their assets.

By the mid-1990s, however, problem banks had become a rarity in Texas, and Mr. Sexton's domestic business was drying up. So Robert L. Clarke, senior partner at Bracewell and a former comptroller of the currency, recruited him to join in some projects sponsored by the World Bank, the U.S. Agency for International Development, and foreign governments to help developing countries establish Western-style banking systems.

"We did a lot of work together in Poland, and in the project in Kazakhstan," Mr. Clarke said. In Poland the two helped the central bank develop a supervision manual, a training program, a call report, an off- site monitoring capacity, and western-style laws and rules. Since then the government has created an independent board to which the regulator reports.

Mr. Sexton also consulted with the governments of Indonesia, Ukraine, Czech Republic, Russia, and Belarus. "You kind of wonder what the stress beyond our shores might mean to this country, but right now I don't see anything that causes me concern," he said.

Friends and colleagues say Mr. Sexton is above all a gentleman, but also funny, fair, logical, direct, and a great writer. His sense of humor was "handy to have when we were going through all those problems," said Mr. Isaac, the former FDIC chairman.

How long Mr. Sexton will remain at the FDIC is an open question, however.

"It relates a lot to whether I'm having a good time or not," and on who succeeds Ms. Tanoue as chairman when her term ends in October 2000, he said.

"I'm loose. I've got total freedom right now."

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