Once again, the problems of a heretofore obscure savings and loan institution have exposed a basic weakness in the American financial structure and have given financial markets a case of the jitters.
In March, it was the collapse of the Home State Savings Bank in Ohio that unnerved foreigners. The decline of the dollar in the period after the closing of 70 Ohio thrifts had as much to do with knocking the dollar off its peaks as the coordinated intervention by European central banks.
This time, mismanagement of Old Court Savings & Loan in Baltimore exposed the frailties of the financial system and probably marks the beginning of the end of the private-insurance system. That can't happen too quickly.
The problem doesn't end with the state-chartered, privately insured institutions.
"We have the potential for a very serious thrift crisis in this country," Chase Manhattan Bank President Willard C. Butcher told the recent Hot Springs, Va., meeting of the Business Council, which includes top executives of the nation's largest corporations.
There is reason to be concerned that the rash activities of some federally insured S&LS and of some banks will pose problems in the future for the FSLIC and the Federal Deposit Insurance Corp. Over the past four to five years, about 1,000 FSLIC-backed S&Ls have been so weak that they have been merged out of existence. Another 1,000 of the remaining 4,000 probably have lost money this year, while the balance have scored good profits.
The FSLIC "pot" of reserves is only about $7 billion -- of which only about $4 billion is said to be available for bailouts -- against $1 trillion in deposits. Thus, the failure of one or two large S&Ls could run the FSLIC pool dangerously low.
The commercial banks are in better shape, because their ratio of capital to deposits is sounder than the same ratio for S&Ls. But banks -- large and small -- have made lots of bad loans, primarily for energy and agriculture. Their exposure in the Third World is well known. Last year, there were 79 bank failures, the highest number since the Depression, and 35 already have closed their doors this year, a two-a-week rate that could mean 100 failures in 1985. Some 900 of 14,700 FDIC-insured commercial banks are listed as "problem" banks. For most of them, that means that there is a significant -- but not yet imminent -- risk of failure.
Under deregulation, the financial institutional framework has become a zoo, in which banks, S&Ls, credit unions, mutual investment funds and the department store investment centers can't be distinguished from one another.
We need a return to old-fashioned, prudential banking and investment practices that will offer a sense of security to depositors. That will require the White House and Congress to step away from blind faith in the ideology of deregulation.
In interviews this week, experts as diverse as Salomon Bros. Vice President Henry Kaufman, Maryland state Sen. Howard A. Denis and Rep. Charles Schumer (D-N.Y.) all told me that, ultimately, the FDIC and FSLIC may have to be merged, implying the full conversion of S&Ls into the commercial banking system.
"There is a real question of what the eventual structure of the financial institution will look like," Kaufman said. "Banks may not look like banks, S&Ls may not look like S&Ls."
In Maryland, it is clear that the mess will be costly. Because of the greed of the go-go, speculative-minded owners of Old Court and similar high-flying institutions, Maryland taxpayers eventually will foot the bill for reimbursing depositors in weak institutions. And the State of Maryland may lose its cherished triple-A bond rating.
It already may be too late for the States of Massachusetts, Pennsylvania, North Carolina and Georgia -- the others that permit state-chartered thrifts backed by private insurance funds -- to avoid the Ohio-Maryland fate. But they should take steps as quickly as possible to move under the federal insurance umbrella.
"Private insurance is an anachronism," Denis said. The only rationale for the private system was that it enabled state-chartered S&Ls to avoid the more rigid federal regulations and to pay cheaper insurance premiums.
"The private insurance system allows them to do anything under the sun," said Schumer, who is leading a congressional drive to reregulate the deregulated industry. For example, Schumer points out, Old Court has $150 million in loans in which the S&L itself is a participant. "In other words, they were lending money to themselves," Schumer says.
It shouldn't be forgotten that consumer greed also plays a role here. The only reason to put money in an institution that has private insurance, as against one with federal insurance (which, in effect, carries the full-faith backing of the federal government) is to make an extra buck. And that is what these institutions push in their advertising.
It was that extra point or two of interest, offered by Maryland institutions insured by the Maryland Savings-Shares Insurance Corp. (MSSIC) that attracted most depositors. Old Court and other MSSIC-insured thrifts peddled their money-market accounts and certificates of deposit all over the country, sometimes offering as much as 3 percentage points over the competition.
A privately circulated newsletter called "Savers Rate News" shows that Maryland's MSSIC-insured S&Ls consistently offered the highest payouts in the nation for money market accounts and short-term CDs. For example, as of April 22, 1985, Old Court paid 10.5 percent on its money-market account compared with 9.31 percent at a major Baltimore bank. And 11.25 percent on a 90-day CD, 2 points above others.
It paid off: In the last three years, after two real estate developers bought out Old Court, its deposits exploded. Its assets -- loans -- jumped from $140 million to $840 million, funds channeled primarily not to first and second home mortgages but for risky commercial real estate ventures, among others.
The lesson in Maryland is the same as it was in Ohio: You don't get something for nothing. What some MSSIC institutions' customers got for that extra point or two of interest was a lot of extra risk.
How could all this have happened? Denis says, "The handwriting has been on the wall for some time." The enormous growth of institutions such as Old Court was common knowledge, as were charges of bad management. Yet, even after the disaster in Ohio -- which dried up the MSSIC-insured institutions' acquisition of new funds -- no one took action. For that failure, the politicians in charge will have to answer to their voting publics.
What will happen now? Schumer believes that Congress should be working on three tracks. First, there should be legislation that gradually phases out all private insurance systems and, at the same time, puts real limits on the ability of the owners of these institutions to use them as their personal banks.
Next, the bank regulation and examining process needs beefing up at both the state and federal levels. Denis reveals that the pay is so poor for Maryland examiners that there has been the kind of turnover that ruins efficiency. In a penny-wise, pound-foolish move, OMB Director David A. Stockman earlier this year rejected Federal Home Loan Bank Board Chairman Edwin L. Gray's request for more examiners.
And finally, Congress should call a halt to deregulation of the financial institutions. It just hasn't worked. Private owners of financial institutions must be prohibited from using the hard-earned deposits of thousands of citizens for the risky schemes they choose to dabble in.