The run on the Ohio savings and loan companies began with a swindle involving a government securities dealer in Florida. Everyone deplores a swindle, but, given the shortcomings of human nature, they are not uncommon in the financial world. The real question here is why one case of fraud should shake so many other institutions and perhaps demolish some of them. The answers are not reassuring.
A company called E.S.M. Government Securities of Fort Lauderdale had been losing money and apparently tried to cover its losses by an elaborate and illegal series of manipulations over many years, according to the Securities and Exchange Commission. When the SEC forced it into receivership, that started the run on a Cincinnati S&L with which it had been dealing. The S&L's deposits were insured not by the federal government but by a state fund that, it quickly turned out, could not cover its liabilities. That is the point at which Gov. Richard Celeste closed the state-insured institutions indefinitely, saying that they will reopen only upon joining the federal deposit insurance system. But some of them evidently will not be able to meet the federal system's requirements.
This melancholy episode fits into a much wider pattern of instability. High interest rates, and the deregulation of the interest rates that banks and S&Ls can pay their depositors, have turned consumer finance into a game of substantial risk and extraordinary complexity. Running an S&L meant, until a few years ago, lending on houses and taking deposits at rates that the regulators held a little higher than those permitted to banks. If it was an unexciting business, it was orderly and secure.
Now the S&Ls must compete directly with not only banks but money funds for their deposits. To survive they must find investmnts that can support comparable interest rates. Other kinds of businesses, from department stores to stock brokers, are pushing into activities that look very much like commercial banking and mortgage lending. To survive this competition the S&Ls are behaving increasingly like banks and the banks are trying desperately, with all the ingenuity their lawyers can muster, to find their way into new and more profitable lines of investment. It means that people who, a decade ago, were in the most staid and stable parts of the financial system now suddenly find themselves thrown into very much more adventurous and uncertain operations. The financial rewards can be high, but as usual the dangers are commensurate.
The sad story of the Ohio S&Ls is another warning that any further deregulation of the financial institutions needs to be approached with extreme caution -- and in some areas re-regulation is worth considering. There's a strong temptation for fderal authorities to say that the trouble is limited to a few small institutions outside the federal system. It would be wiser not to count on that.