VIEWPOINTS : Free-Wheeling Banking Rules Are a Costly Folly : Some States’ Liberal Regulations Force Conservative Operations to Pay the Tab of Industry’s Gamblers

Rep. Thomas R. Carper (D-Del.) proposes to blow up the Glass-Steagall legal barrier that keeps U.S. banks locked in the banking business, using the good old American dynamite of states’ rights. But states’ rights is already alive and well, costing us a lot of money in the banking business.

States have equal rights with the federal government to charter and empower banks, savings and loan associations and credit unions. The result is what James Robertson, when he was vice chairman of the Federal Reserve Board, called a “competition in laxity.” States are giving financial institutions broad powers, knowing full well that if the banks and thrifts fail, federal insurers can be relied upon to protect customers’ deposits. What regulations survive are enforced with tender loving care until, as the historian Bray Hammond put it, the regulator becomes “embarrassed by institutions that it wishes would, for God’s sake, creep into a rival jurisdiction to die.”

Sometimes the gaps that open between the state and federal authorities are fun and games. I remember a visit to Toledo, Ohio, a few years ago, and my discovery that Toledo Trust owned and operated the biggest travel agency in town.

The Federal Reserve had not long before ruled that travel agenting was not a business “incident to banking,” and that a bank holding company could not legally own such a venture. The legal owner of Toledo Trust was a bank holding company subject to Federal Reserve supervision. But the bank at the heart of the holding company was an Ohio-chartered bank, and Ohio law permitted a bank to own a travel agency, so Toledo Trust was a travel agent, whether the Fed liked it or not.

But giving states the right to erase the Glass-Steagall line between commercial banking and investment banking is more likely to look like what has happened in the S&L; business. State-chartered thrifts have been given a green light to risk their money where federally chartered institutions are forbidden to tread.

In both Texas and California, S&Ls; have been permitted to become owners of, rather than just lenders to, all sorts of industrial and commercial as well as residential ventures.

There is a sure way to make money in California. You get an S&L; charter, buy money from nationwide money brokers to the extent of nine times the founders’ original investment, and pick 10 ventures--a chain of tanning salons, say, and a kiwi processing plant.

Invest the legally permitted 10% of the S&L;’s money in each of these schemes. If one of them comes through, take the S&L; public and pocket the profits. If one of them fails in ways that can’t be hidden, turn this S&L; over to the Federal Savings and Loan Insurance Corp., and apply to the state commissioner for a charter for a new one.

It is by no means a coincidence that the most desperately insolvent thrifts, the S&Ls; with the worst net worth to assets ratios, are to be found in California and Texas, where the rules on where depositors’ money can be risked are the most lenient.

A recent story in the Wall Street Journal told of an S&L; examiner from Ohio who had been working on assignment to the Federal Home Loan Bank of Dallas long enough to be bewildered by what he found when he returned home. He was sure the Ohio S&Ls; had to be concealing some of their expenditures. Where, he inquired, were the budget lines for the jet and the yacht? Where on the personnel chart were the Ohio thrifts hiding the French chef? All the Texas thrifts he had examined had that sort of thing.

Californians, meanwhile, have had the unedifying spectacle of former Treasury Secretary William E. Simon and former Federal Reserve Board Vice Chairman Preston Martin playing “heads I win, tails you lose” with FSLIC, making bids to take over insolvent S&Ls; on a basis that saddles the insurance corporation with the lost gambles and leaves Simon and Martin free to make money on the good ones and on all the neat things a California state charter permits.

In this year especially, one would have thought congressmen would know better than to turn over to the states decisions about the assets in which banks and S&Ls; can invest the money people deposit because they know agencies of the federal government guarantee the payment of both principal and interest. For the chickens have been coming home to roost.

Though the recent FSLIC bailout bill pretends to load the costs of the nation’s many failed S&Ls; on the shoulders of the still-solvent thrifts, the paper the Federal Home Loan Bank Board will issue for that purpose is clearly a Ponzi game, like a chain letter, with the interest on the bonds to be paid by FSLIC itself.

Concealing True Cost

Everyone in Congress knows perfectly well that at some point the federal government, meaning all the nation’s taxpayers, will have to pick up the bill for reimbursing the depositors in busted thrifts. And most of them know perfectly well that the basic reason why three-quarters of the rescue money is needed in Texas and California is the invitation those states gave to their S&Ls; to bankroll their trips to Vegas with federally insured deposits.

The Reagan Administration came to office committed to put a stop to the fakery by which government helped some people but not others through tax breaks and off-budget guarantees that distorted the economy and left the Treasury at risk for the follies of others. Instead, when federal banking regulators bailed out Continental Illinois, they paid off not only the open and aboveboard depositors in the bank but also the shadowy tax-evaders who had bought the holding company’s bonds and notes in the Netherlands Antilles. And they said more or less openly that the U.S. government would not permit any of the 10 largest bank holding companies to fail on any of their obligations, however exotic.

Tricky Way to Conceal Costs

“Deregulation” on these terms is like a fire insurance company encouraging developers to make more money by building firetraps. The crusade to kill or at least price the guarantee programs faltered even before David Stockman left the Office of Management and Budget, and now the Reaganauts are as bad as any of their predecessors in their scramble to conceal from the accountants the true costs of what the government does.

Coming up in Congress this month is the piecing together of some tricky way to conceal the costs of rescuing the Farm Credit Administration, another government guarantee program that permitted the people running a financial intermediary to go hog-wild in their choice of assets.

Especially as an election year nears, the pigs see the troughs, and the game in Congress becomes not the writing of honest budgets or the making of policy, but a way to pour out the swill under cover of night.

Federal deposit insurance without federal control over the assets those deposits purchase is nothing more than a federal subsidy to the banks and thrifts, and an inducement to the states to forget about government’s role in maintaining the safety and soundness of our banks.

One can see why the bankers would be gluttons for subsidies, but not why the government should be a glutton for punishment.