I have just read "Banking on the Brink" by Roger Vaughan and Edward Hill.

The two got their 15 minutes in the sun recently by asserting that 1,150 banks are insolvent and could cost the Federal deposit Insurance Corp. up to $10 billion to resolve.

I bought the book to review the reasonableness of the assumptions they used to arrive at their estimates.

Under their "optimistic" scenario, Vaughan and Hill arbitrarily inflicted a balance-sheet markdown of 80% on other real estate owned and all nonperforming loans. All loans 90 days past due were marked down 60%, as was restructured real estate.

Under their "pessimistic" scenario, they made the same markdowns and then discounted all construction and development loans by 40%, multifamily real estate loans by 30%, and all commercial realty loans by 20%.

No rationale is offered for these massive discounts.

Ludicrous Figures

I have been in banking and bank regulation all of my adult life and have never had anyone suggest asset writedowns of anywhere near this magnitude.

The wonder, after the writedowns by Vaughan and Hill, is that only 1,150 banks were found to be insolvent.

Even though I had discovered in the first 10 minutes or so all I needed to know to dismiss the loss estimates by Vaughan and Hill, I took the time to read their entire study. I did so because I was curious about all of the attention the work had received.

Vaughan and Hill, you see, are anything but household names in the world of finance. I had never heard of them - and have found no one else who had.

Yet, their study was immediately embraced by many in the media and was given widespread publicity.

Hobart Rowen, a columnist for The Washington Post (whose parent company published the study), was as giddy as a teenage boy just home from a date with the prom queen. "The Vaughan/Hill book does so many good things they can't all be listed in a column like this."

The book even provoked a question about the banking system at the last presidential debate, and Ross Perot cited it as authority for the proposition that a major banking collapse was looming.

So I read the book carefully to see what it had to offer,

Vaughan and Hill appear to be well read, and they write well. But there are no original thoughts in the publication.

They do a reasonable job of describing the evolution of banking in the United States, though they pay too little attention to the role of excessive government regulation in weakening the industry's competitive standing.

They acknowledge that repealing the Glass-Steagall Act and breaking down the barriers against interstate banking, the barriers between banking and insurance, and the walls separating banking and commerce would each be helpful.

But the writers would put these reforms on the back burner, as only the stronger banks would be helped and our most urgent priority should be to clean up the weak banks.

Feeble Solutions

Vaughan and Hill correctly identify deposit insurance reform as the most critical issue facing the industry. But then they punt.

Concluding that meaningful deposit insurance reform is not feasible politically, they promote such notions as risk-based deposit insurance premiums, mandatory private reinsurance of deposit insurance, narrow banks, and cross guarantees among syndicates of banks.

These ideas have been around for a long time - and have not improved with age.

Vaughan and Hill are enamored of market value accounting and seem to have no concept of its enormous complexity (unless one were willing to be as arbitrary as they were with their loan writedowns).

Nor do they consider what kind of banking system would result, or whether that system would properly serve our nation's economic interests.

Their notions about what makes bankers tick (the bigger the bank, the more they get paid) are shallow and simplistic. So are the thoughts about where banking is heading (retail bank, merchant bank, boutique bank - and never the three shall meet).

Unjustified Clout

Vaughan and Hill are but the most recent in a string of self-proclaimed experts who are attempting to reshape the nation's banking system.

These are people who have never held significant regulatory positions and have little or no banking experience. Most have never met a payroll of any consequence.

These pundits are having a tremendous impact on the great banking debate. They are dominating the discussions in the media, and they are having a significant influence on the congressional staffs.

Bankers in this country are in grave danger of losing the political war. Bank chief executives should rise up and take charge of the political process. The industry must develop some credible and effective people to make its case, countering the ivory-tower nonsense that is being spewed forth by various academics and consultants.

Mr. Isaac, a former chairman of the Federal Deposit Insurance Corp., is managing director and chief executive of the Secura Group, a Washington-based financial services consulting firm.

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