THE NET WORTH of Old Court Savings and Loan of Baltimore, according to a preliminary accounting, is minus $175 million. That is the amount by which its debts exceed its assets, and the reason why Old Court now finds itself in another kind of court. Who is to make up the shortfall? The state of Maryland -- first with deposit insurance funds, then if necessary with taxpayers' money.
The conclusion to be drawn from this unhappy episode is that states should not try to supervise and regulate modern financial companies. The current experience in Maryland, like the earlier case in Ohio, argues powerfully that states are not well equipped for the work. It's not simply that two or three high-flying S&Ls somehow managed to slip beyond state supervision. The real message here is that S&L operations have rapidly evolved over the past half-dozen years to a degree of complexity with which state agencies cannot begin to cope.
Policing the S&L industry is a responsibility that falls properly to the federal government. The federal agencies have a level of technical expertise that no state can match. More important, they have a kind of political independence and institutional strength that their counterpart in Maryland certainly never approached. The history of the Old Court case begins with the very relaxed surveillance of an industry that was changing much faster than the state government ever seemed to understand.
It's worth repeating that point, since some of the commentary from Annapolis recently suggests a recurring reluctance to close down the state-insured S&L system promptly and absolutely. Melville S. Brown, the Florida banker who is the newly appointed director for the newly established Maryland Deposit Insurance Fund, deserves applause for his courage in taking the job. B goal has to be to work himself out of that job as fast as he decently can.
Some of the S&Ls previously regulated by the state have qualified for federal deposit insurance and will now be inspected by federal examiners. Some, such as Old Court, have collapsed, and some are being auctioned off to New York banks that buy them to acquire the legal right to open branches in Maryland. But some are too small to qualify for federal insurance and yet want to remain independent.
Some of them will soon begin to tug at Mr. Brown's sleeve and whisper that perhaps after the crisis passes he and the state might reconsider the decision to shut them down. But Mr. Brown needs to be adamant on that point. The state's responsibility to both taxpayers and depositors is to get out of the business of regulating S&Ls, with no exceptions. The idea that the state has adequate resources to oversee S&Ls is an illusion -- and, as Old Court has demonstrated, an extraordinarily expensive one.