Mr. Nadler Goes to Washington
"Professor Nadler," the lady on the phone said, "Congressman LaFalce has read your American Banker column on the folly of overenthusiastic regulators taking over banks that could have made it on their own ["When Should a Bank Be Closed?" June 10]. He wants you to come to Washington and testify before his committee on small business on the topic."
I thought the idea was wonderful for several reasons. First, I had followed Rep. LaFalce's successful effort to pass legislation protecting mortgage borrower's rights, and I felt it was extremely useful legislation.
Second, I felt the small-business committee was the right place to prepare legislation slowing down the process of closing banks. The large borrower can go to commercial paper market or foreign lenders, but the small business is dependent on the survival of his local bank for credit accommodation.
And third, I thought it would be fun.
Of Sausages and Legislation
I have never before had anything to do with Congress, believing the old saw that "those who like sausages or legislation should not see how either is made."
The staff director of the committee, Donald Terry, agreed to let me come down and just talk, as I would to bankers or students, and to use my column as the official transcript. I was D.C. bound.
I arrived at 8 a.m. on the night sleeper, after teaching the evening before in New Jersey. I felt superimportant as I walked from Union Station to the Rayburn Building. Lots of other people walking the streets were just tourist going to see the White House or Smithsonian. I was part of government for the day.
And when they showed me the hearing room, which looked like the one used for Watergate or the ones in which major issues are debated, I felt just great.
In Exalted Company
My fellow witnesses also made me feel important. They were Leland Prussia, retired chairman of BankAmerica; Stephen Roberts, who once was assistant to former Fed Chairman Paul Volcker; and Thomas Brooks, former general counsel of the Federal Deposit Insurance Corp.
Obviously, I was way over my head in terms of experience and knowledge.
But when the committee chairman, John J. LaFalce, D-N.Y., started the hearings, I found we all agreed on two main points. One was that regulators close banks too soon.
And the other point on which we agreed was that these same regulators were reneging on agreements. These original deals allowed financial institutions to use goodwill as capital if they took over other institutions or raised a certain amount of new capital.
Trustworthy or Not?
We all questioned how anyone could trust the government when it makes deals only to say that new laws make these deals null and void.
I told the chairman during my testimony that I was planning to write a column on this. He said that it should be entitled "Politics of Atonement and Fear" to indicate how far the pendulum had swung from the days of savings and loan underregulation and regulatory laxity.
What did we accomplish that morning? I don't know. I do know that Rep. LaFalce was there throughout the hearing, giving every witness rapt attention, and that there were nine other House members who attended for part of the hearing.
And those members who did stay for the guestion-and-answer session were all deeply concerned over the inability or unwillingness of most banks to make small-business loans today out of fear for the impact of any lending on their remaining strength.
I feel that among the most important points we made was that it is ridiculous to close a bank based on capital inadequacy when the decision as to what is capital is so subjective and is changed so often.
We agreed that as long as a bank is now operating profitably, has good new honest management - management that is not part of the problem, has a good retail franchise and an economic need, and has a solid business plan with private capital, then it is less costly to keep it open than to close it.
We pointed out that it makes banks weaker than necessary when the Resolution Trust Corp. ignores the value of such intangibles as core deposits, credit cards, and mortgage servicing in determining whether a bank has enough capital.
Fourth, we indicated that if a bank is earning more than its expenses and if it stays within the normal range of deposit rates in its region, it doesn't hurt anyone else.
I feel my main contribution was my response to Rep. Bill Sarpalius, D-Tex., when he asked why banks won't make agricultural loans any more.
I responded that Congress has enacted Chapter 12 of the Bankruptcy Act, which gives farmers special protection and dispensation if they declare bankruptcy. That makes it much harder for banks to collect on their outstanding credits from whatever assets are left to the debtor.
"How can you tell the bankers they can't get their money back if the farmer goes bankrupt and then wonder why bankers won't make as many agricultural loans as before?" I asked.
But as to what Rep. LaFalce and his associates can do about solving the problems through legislation initiated in their committee, I left Washington far from optimistic.
Nonetheless, I headed back to Union Station happy I had been a witness and far from discouraged. I felt that this grass-roots type of hearing at least lights some kindling for remedial legislation on banking.
Mr. Nadler is a contributing editor of the American Banker and professor of finance at the Rutgers University Graduate School of Management.