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Seidman on Deposit Insurance Reform

MARCH 22, 2002


Excerpts from Remarks at ICBA Convention

In response to interest in the remarks on deposit insurance reform of The Honorable L. William Seidman at the just-concluded ICBA annual convention in Hawaii, a verbatim text is reproduced below. It includes the Q&A in its entirety, with the only deletions being the names of the bankers who asked two penetrating questions.

Every banker has to look at the economy and decide what's going to happen-then he has to decide how to accommodate to it. And all of you as survivors know exactly how to do that. Now there's one thing that's both new and old. And that's the fight that is going on for the comprehensive deposit insurance reform bill. It's been my pleasure to work with Chairman Tanoue and Chairman Powell-two very fine leaders of the FDIC-to help work on that project. And I may have started it-I don't know. About five years ago, I was at an ABA conference and someone asked me what are we going to do about the fact that the fund is over- funded -we should get some money back. And I said, if I were you I'd rather buy more insurance with that money-why don't you just raise the limit from $100,000 to $200,000? That would provide a strong support for the community banks in an era of too big to fail. Well, that was reported immediately to whoever was the head of the ABA at that time, it was one of the bankers from one of the largest banks in the country. And his response to reporters when they asked him about my suggestion was, "Seidman is crazy." (Audience laughter). I knew I was on the right track at that point. (Audience laughter and applause).

In looking at deposit insurance reform and incidentally I'm going right from here to do a broadcast on that subject for CNBC as soon as I'm finished here. Looking at that problem, I'm am continuously amazed that the likes of Larry Summers and Senator Gramm and Chairman Greenspan have taken such strong positions on this without first even listening to why it ought to be changed. I know that the President got quite a reaction with his three countries in the axis of evil. I won't say that this is also the axis of evil. (Audience laughter). But it's not too far from it. (Audience laughter). And the basic argument that they made almost immediately was-well this is an unwanted interference in the marketplace-this is not free market economics; we are for free market economics. It seems to me that for the chairman of the Fed to say that-since the Fed is a greater interference in the free marketplace-(audience laughter and applause)-it seems to me that it is terribly unsupportable. And for Senator Gramm to say that, well, that's not too surprising because he generally says that he's against anything that interferes in the marketplace, but what does he do all the day-he passes bills that have something to do with interfering in the marketplace. (Audience laughter and applause). And Summers is now president of Harvard and he's got his own trouble so I won't bring him up. (Audience laughter).

Anyway, then the second argument is-now this could be very costly to the government-look what happened last time. And as Chairman Powell put it to you-it has never cost the government a penny. Oh but the S & Ls did. Well the S & Ls of old days are no longer a part of our system. And run right, obviously you can continue to keep it on the basis that it won't cost the taxpayers a penny. And if you want to pay for more insurance, why should they keep you from trying?

Anyway, it's going to be a tough battle but Summers is gone. The present Treasury-I don't think Paul O'Neill feels this in his heart very much. He inherited the position and he had some subordinates who were strong but I don't see the Treasury being a real battle. I'm amazed if Greenspan really wants to take this on, when he's got the whole world on his back in other areas. And Senator Gramm is retiring. So time marches on and I think you will be able to move ahead in this. I heard the question yesterday-why don't we go back to the $200,000 instead of settling for $130,000? Of course the idea is to get as much as you can and hopefully you can get more. If we could do something about Mr. Greenspan, I'm sure you could get more. So, I think you'll do well and I wish you well and on my broadcast I will do whatever I can to push it along.

Q & A

Q: Mr. Seidman, ... I'd like to first of all thank you for your strong leadership when you were FDIC chair and I had the good pleasure of working with you quite a bit and I appreciate that very much. I'm also very interested in your remarks here about deposit insurance and your support of increasing that and recalled your strong position that too big to fail really was the law of the land and I think you said that a regulator hasn't been born yet who will fail one of the largest banks in this country. So in light of that and the feeling by some that deposit insurance is really a subsidy to the banking industry, would you comment a bit on the fact that perhaps too big to fail is really the greatest subsidy to the banking industry and how can banks like ours really combat that and really make some progress on expanding the level of coverage?

A: Thank you. I think that-I guess the question is-is too big to fail still alive and well despite some provisions in that area. I think there's no doubt that too big to fail applies not only to the United States but around the world. No country-no major country has ever let a major bank fail in so far as its depositors are concerned. Shareholders may lose out and they will in the United States. So it's never happened yet and I doubt that anyone would close down any of our 20 largest banks. So too big to fail is there and it's a fact not only world wide but it's a fact in the minds of people who make deposits. So this is another reason for deposit insurance to increase. After all if you index it from the last increase, it is $200,000-$196,000. I think you can win this one and I think you can win it because-I look over this group today and I've been coming to these for a long time. You've got a really surprisingly young, invigorated and prosperous group. The men are handsome. The women are beautiful. (Audience laughter) Like Garrison Keeler says-all of the children are above average. (Audience laughter) I don't see why you ought to lose this one. (Audience Applause)

Q: Mr. Seidman ... I was one of your customers back in the eighties. Thankfully on the buying side at that time when things were a little tough out there. There was a front-page article in the Wall Street Journal last week about the growing significance of oligopoly here in corporate America. I believe there were at least eight different industries that were listed in which the consolidation process is very, very significant. Of course, our focus here is on the financial services industry and you mentioned Chairman Greenspan's free market policies and the question to you is-do you think Chairman Greenspan's free market policies, which are driving the relentless consolidation of our financial system-can these new emerging monsters be adequately supervised as they move under the Fed umbrella?

A: The question is the whole country has seen a lot of consolidation-particularly in the financial industry. Is there anybody that can actually supervise these large institutions and what does that mean for our economy? Well, we have a long tradition in this country of trying to prevent concentrations of power-economic power, political power. Our whole system is based on splitting power. The antitrust rules were put in for that reason. So we have a history of worrying about too much concentration because of two reasons: 1. risk of failure of the institution; 2. the risk of economic power controlling political power.

I happen to be one of those that comes from a reasonably small town and grew up in a period where we saw a huge collapse of our system and I believe there is merit in trying to difuse power. In today for instance in communications, we're getting an increasing ability of four or five companies to control what you see and read and hear and so forth. The difficulty is how do you deal with that and still maintain a marketplace where there is true competition and that's one of the great questions of our day-is how can we maintain that old time spirit of diverse units and still allow competition, which is at the heart of our successful economy.

My own hope is that community bankers can get a level playing field so they'll be able to hold their own. But without a level playing field, we are really doomed in the long run. So that' s why this fight for deposit insurance reform and the level playing field is so important. I hope that this government will continue to support antitrust and other things, which prevent monopolies in this country. With all you can say about Microsoft and all they've done-that monopoly is a very dangerous thing for our economy in my view-(audience applause)-and therefore it takes a lot of government to keep it under control.