An unusually concise critique of government performance occurred last week on Capitol Hill when former regulators of the savings and loan industry were asked to examine their own records and those of other colleagues.
Sen. William Proxmire (D-Wis.) surprised Banking Committee members and witnesses alike by asking two former Federal Home Loan Bank Board chairmen, Jay Janis and Richard T. Pratt, to name not only their own greatest mistakes while in office but also each other's.
He then requested similar answers of them relating to the incumbent, Edwin J. Gray, as well as for the Banking Committee under its present and past chairmen, Jake Garn (R-Utah) and Proxmire.
The off-the-cuff report card Proxmire requested covered the transformation of the savings and loan industry, beginning in the late 1970s, under the pressures of new technology, severe economic swings and deregulation.
While savings institutions are expected to post record profits in 1985, there is still concern that a portion of the industry -- estimated at between one-tenth and one-third -- is deeply troubled and may not survive.
Potential failures, due to the lingering effects of high interest rates on loan portfolios as well as the more ominous consequences of poor investments and poor management, threaten the $6 billion Federal Savings and Loan Insurance Corp. fund with $16 billion in contingent liabilities.
Who is to blame for this situation and how could it have been avoided? At a hearing Thursday on ways to reform -- and thereby protect -- the insurance system, former government officials engaged in some revealing hindsight for a few moments.
Jay Janis, a California savings and loan executive who was chairman of the FHLBB from 1979-80, gave this succinct analysis: He was too slow to deregulate. His successor Pratt (1981 to 1983) was too quick to deregulate, he said. And Gray (1983 to the present), who tried to slow down deregulation, ended up confusing things by taking too broad an approach, Janis said.
As for Congress, Janis found that Proxmire, Banking Committee chairman from 1975-80, approached deregulation backwards, starting with deposits instead of assets. Removal of interest-rate ceilings and creation of short-term money market accounts led to increased costs, but thrifts were not given the leeway to vary their investments to offset these changes. But Janis said that Proxmire's successor, Garn, in giving S&Ls this leeway, has been too slow in recognizing the problems caused by The off-the-cuff report card covered the transformation of the S&L industry in the late 1970s, under the pressures of severe economic swings. deregulation.
Janis admitted in retrospect he probably should have pushed Congress and the FHLBB to deregulate assets along with liabilities.
Pratt, a very strong advocate of deregulation, took all the barriers down quickly, whereas he probably should have phased it in, Janis said. Pratt failed to provide sufficient supervision and examinations to make sure the industry didn't abuse its new freedoms.
Gray, in attempting to slow down what Pratt did, used a shotgun instead of a rifle, hitting all with new restrictions instead of targeting those institutions making overly risky investments and poor underwriting of direct real estate investments.
Janis said Proxmire's mistake led to many serious problems for the industry, which wound up having to pay higher rates for deposits at a time when it could not get a greater investment yield on its portfolio. Consequently, institutions' balance sheets were mismatched and they suffered greater losses and erosion of net worth.
Garn has been slow to deal with problems, Janis noted: "He has been talking about new powers at a time when at least some of the financial institutions in this country are falling down around his ears." In his opinion, Garn should have foreseen several years ago the problems deregulation would cause and made reforms, such as strengthening FSLIC. Pratt, who now heads Merrill Lynch Mortgage Capital Inc., admitted to two mistakes. One was his failure to appreciate that the FHLBB standards on capital requirements were too low to maintain a sound industry. The second was not having moved more aggressively in improving the management of the major regulatory systems and incorporating more realistic accounting practices.
In Pratt's opinion, Janis failed to recognize -- as did others at the time -- the path of erosion of the financial strength of the thrift industry, occurring as the result of restrictions on assets and a lack of flexibility.
Pratt's critique of Gray was mild. "I think he should have stayed with cheese sandwiches instead of tuna," he quipped in reference to working lunches.
Pressed by Proxmire, Pratt implied that Gray had been slow to act when he took over. "Given the magnitude of the problems that were occurring, it was unfortunate that the transition time it takes for an agency to change hands and for new regulators to be fully up to speed on the issues" was so long, he said.
As for Congress during Proxmire's tenure, Pratt said legislators failed to recognize the importance of market forces. As for the erosion of thrifts' capital or net worth, he faulted "misguided social policies," namely "forcing institutions to be more committed to issuing long-term, fixed-rate loans when what they really needed was some portfolio management and more access to the capital markets for longer-term liabilities."
But he praised fellow Utah Republican Garn for his responsiveness to Pratt's ideas and his support of deregulation. The 1982 Garn-St Germain Act gave banks and thrifts additional powers.