Vartanian's Tonic for S&L Industry

American Banker: Was the 1989 thrift bailout bill a mistake? Thomas P. Vartanian: The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 and the Resolution Trust Corp. were basically sound ideas. Where the train left the track is that the plan should have been phased in over a longer period - five, 10, or 15 years. AB: Why drag it out? TPV: It would have been more feasible in terms of the government's resources and capabilities, so that we didn't have 1,000 institutions and $500 billion in assets sitting there at one time. AB: Wouldn't losses have grown if the S&Ls were given more time? TPV: Forbearance has been a part of banking as long as there's been banking. What the FDIC and the FSLIC did in the 1980s was to manage the crisis.

Banking is a business of making illiquid loans. You can't mark them to market daily.

Regulators always have said: "Let's manage the rate at which they fall off the table, and don't let it exceed our capabilities."

Depending on where you are in a business cycle, at any one time the whole industry might be insolvent.

It's not a question of solvency on a mark-to-market basis. It's a question of long-term viability, liquidity, and recognition: How much weakness does it make sense for regulators to recognize? How much of the weakness has to be carved out during a cycle?

That changed hin 1989. All of a sudden, guys like Richard Breeden and others in the administration decided to regulate the business on a snapshot basis. Unfortunately, at that time - whether it was part of the administration's plan or not - the S&L business was substantially insolvent on a snapshot basis. AB: Wouldn't your approach have exacerbated problems caused by overcapacity in the industry? TPV: I don't think you can eliminate 50 years of bad regulation and bad social policy in six months - without having a real hiccup in the economy.

I'm not saying they should have left them open without controls. But I would argue that keeping the least amount of assets and institutions in the government's hands at any one time has to be in the best interest of country. AB: Is it too late to turn back? TPV: Yes. You can't get the toothpaste back in the tube. AB: What would you do now if you were in charge? TPV: Focus on the positive rather than the negative. We've had the negative for two years: the S&L closings, the bad news, and very zealous enforcement.

If you want to pursue that course, you have to assume that the entire S&L business will have to be eliminated. If that continues any longer, there's no market credibility in the industry. won't be able to raise a dime on Wall Street. If you can't get capital, you can't exist. AB: So you do what? TPV: You go back to bank regulation, as opposed to enforcement; make the charter more attractive. Nobody is going to invest in a banking charter that isn't worth anything. The market for thrifts now is all but dead.

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.