June 6, 2001
Honorable Phil Gramm
United States Senate
SR-370 Russell Senate Office Bldg.
Washington, DC 20510
Dear Senator Gramm:
As you know, I was with you when you spoke with the press following your remarks to the ICBA national leadership. In answering a question from the American Banker reporter after you left the meeting room-where the topic of deposit insurance reform was not discussed-you referenced deposit insurance as causing the S&L crisis.
I have a different interpretation that I would like to share with you as a participant in the events that directly caused the failure of thousands of S&Ls in the 1980s.
On October 6, 1979, Federal Reserve Chairman Paul Volcker cut short a European business trip, flew home and immediately convened an emergency meeting of the Fed Board. I was an assistant to the Board at that time. This historic meeting changed the monetary policy of the United States, targeting the growth in the monetary aggregates rather than short-term interest rates. I don't believe that it was foreseen that this new monetary policy would result in the prime rate being driven over 20 percent as well as further destabilizing interest rate fluctuations.
Then, in late March 1980, the Depository Institutions Deregulation and Monetary Control Act of 1980 was signed into law phasing out interest rate controls. Interest rate deregulation in a climate of rapidly rising and fluctuating interest rates broke the backs of thousands of thrifts that were sitting on long-term, fixed-rate assets.
The S&L crisis was a direct result of the Federal Reserve's interest rate policies and the passage of legislation authorizing interest rate deregulation. These policy actions created a perfect and historically destructive storm for the savings and loan industry and hundreds of banks as well.
Deposit insurance and, in my judgment, the $100,000 coverage level, helped stem deposit panic during this crisis period. It is my further judgment that if deposit insurance levels had been increased to $50,000 rather than $100,000 in 1980, as proposed in the bill that passed the House, there would have been the same frenzy to secure brokered deposits by CEOs of failing thrifts. Proposals by the FDIC chairman to limit brokered deposits were turned aside by Treasury Secretary Donald Regan. In turn, regulators perhaps could be faulted for not promptly closing "brain dead" S&Ls (as they were referred to at the time). But as you know, this would have devastated Texas, Florida and California, which had the heaviest concentration of S&Ls. In my judgment it wouldn't have been politically acceptable.
It is also worth noting that in the Federal Reserve Board's testimony before the House Banking Committee on February 20, 1980, Governor Partee indicated that "the Board agrees that the proposed increase would be in the public interest, but is inclined to favor an increase to $100,000 as contained in H.R. 6216." This testimony was given during the final stages of congressional consideration of the legislation-Senate conferees concluded their work on the bill on March 21 and the Federal Reserve's recommendations were adopted. My memory of the conference and that of other conference participants I have spoken with is that the then-FDIC chairman also signed off on the increase to $100,000.
I would concede that increased deposit insurance levels may have increased the costs to the taxpayer of resolving the S&L crisis that was caused by the policy decisions I have described. But the United States came through this crisis with consumer confidence in our banking system largely intact because of deposit insurance.
Thank you for considering my views.
Kenneth A. Guenther
President and CEO
cc: Chairman Paul Sarbanes