Isaac Defends the Steps that Regulators Took

To the Editor:

Mr. McTague's commentary was replete with factual errors and certainly was not in keeping with his usual high reportorial standards.

It's difficult to know where to begin in correcting the misinformation, but let's start with a little background. Due to extraordinarily high interest rates, the Federal Deposit Insurance Corp. was hit with the savings bank crisis in 1981.

The agency decided to handle the failure by merging failing institutions into stronger institutions, with adequate FDIC financial assistance offered on a competitive bid basis. Goldome, which was relatively strong at the time, was the winning bidder on three of the failed institutions and received sufficient financial assistance to remain viable.

That Was No Forbearance

Mr. McTague apparently feels the FDIC should have liquidated the failed institutions instead of "forbearing." Merging failed institutions into other banks with FDIC financial assistance and dismissing the failed banks' top officers and entire boards hardly constitutes "forbearance."

The decision to do assisted mergers rather than liquidations was made for three reasons:

* The mergers averaged about one-half or less of the cost of liquidations.

* The New York Superintendent of Banks said she would not close the banks if the FDIC chose to do liquidations.

* And the FDIC was concerned about creating a run on all thrifts if it were to liquidate the failed savings banks.

In view of the subsequent $200 billion debacle in the S&L industry, one might legitimately question the wisdom of the choice made by the FDIC, but at the time the decision not to liquidate was deemed prudent by virtually everyone.

There was certainly no dissent inside the FDIC or, to my knowledge, in the rest of the government.

Mr. McTague asserts that the $720 million spent by the FDIC on the three failed savings banks that were merged into Goldome should be added to the $930 million the FDIC estimates that the Goldome failure will cost. I'm at a complete loss to understand his rationale.

The $720 million represents the losses (including the present value of all estimated future payments) incurred and charged off by the FDIC in the early 1980s when Goldome acquired the three failed savings banks. On what basis would the FDIC double count those losses?

Mr. McTague expresses dismay that the FDIC's assistance to Goldome continued for many years after it acquired the failed institutions.

Options Were Few

The Goldome deals and several others in that era were structured to give the acquirors long-term assistance to help defray the carrying cost of the long-term, fixed-rate bond and mortgage portfolios in the failed institutions. The FDIC either had to do that or sell those long-term portfolios at a huge loss in an extraordinarily high interest rate environment.

The FDIC chose to bet that interest rates would come down and that it would be better off financially giving an interest-rate spread guarantee rather than selling the portfolios. Even in hindsight the decision was absolutely correct, and the FDIC saved hundreds of millions of dollars.

I can't believe Mr. McTague is serious when he contends the FDIC should have subsequently broken its contract with Goldome.

Finally, Mr. McTague completely misses one of the most important causes of the Goldome failure. Goldome, after doing the three deals with the FDIC and then experiencing the fall in interest rates in 1982 and 1983, began to feel rather frisky. It decided to expand into new geographic areas and lines of business.

The FDIC became concerned about Goldome's increasing risk profile and insisted that it curtail its activities or raise a substantial amount of capital by converting from a mutual to a stock organization.

Goldome elected to do neither and instead converted to a federal charter in 1983. Goldome reverted to a state charter, and direct FDIC supervision, when it finally converted from mutual to stock in 1987.

William M. Isaac Managing Director & CEO Secura Group Washington

Editor's Note: Mr. Isaac was chairman of the FDIC from 1978 to 1985.

Mr. McTague replies: The FDIC's choices in 1982 were not as limited as Mr. Isaac would suggest. The agency - after conducting over 40 assisted mergers - still was able to shell out $92 million in rebates to bankers at the end of the year without hiking premiums.

Had the FDIC employed its standard funding formula for assisted transactions, Goldome would have received between $750 million and $1 billion up front from the FDIC. Goldome would have been a better capitalized thrift, but the FDIC rebate for the year might have been jeopardized.

Goldome beat out the other bidders because it proposed a deal that required the FDIC to pay it just $452 million, with much of the costs spread over 15 to 20 years.

Ironically, this bargain agreement ended up costing the FDIC $750 million anyway, according to Mr. Whitney. That hardly seems reasonable.

Why do I add the $900 million it cost this year to buy Goldome to the $750 million cost of birthing it? The institution was the FDIC's "frisky" Frankenstein, and it bled the FDIC money right up until the hour of its death, including $35 million in preferred stock the FDIC received in 1987, when Mr. Whitney says the agency obtained concessions from the institution.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.