GERRY FINDLEY : Banking on Trust : Consultant Says Industry Image Intact Despite S&L; Woes

With 32 years of experience, the fiercely independent and outspoken Gerry Findley has become the dean of California banking consultants.

Through his Brea-based company, Findley, 68, has helped to start more than 200 banks and savings and loans. He regularly advises bankers on such things as their dealings with regulators, their executive compensation programs, their policy manuals and their merger and acquisition negotiations.

The Findley Reports, a family owned business, has grown into multifaceted operation that also includes the publication of books, manuals and annual reports on the financial results of California’s banks and its savings and loans. His two daughters operate the publishing and bookkeeping end, and his son practices banking law out of the suite of company offices.

Findley, who is partial to the smaller, independent banks, is wary about the effect that legislative efforts to save the S&L; industry will have on the banking industry. President Bush, who proposed the legislation, already has arranged a task force of regulators from the Federal Savings and Loan Insurance Corp. and Federal Deposit Insurance Corp. to handle the plethora of problem S&Ls.;

Besides rejuvenating the cash-starved FSLIC, the bills would fold the FSLIC into the FDIC, which insures deposits at banks. It also would merge many of the regulatory functions.

Findley recently spoke with Times staff writer James S. Granelli about his concerns for the banking industry under the Bush proposal.

Q. Will FDIC examination of all the savings and loans mean that S&Ls; will now be held to much stricter insurance rules?

A. They are certainly going to be held to a much stricter code of conduct and examination standards than they have been. I think in a short period of time, the FDIC standards will be the same for banks and savings and loans. This is going to restrict the entry of new savings and loans. Of course you’ve got to realize that we have had no savings and loans created in the last 3 or 4 years, which in itself says something about the need for this industry.

Q. Are the FDIC and banking regulators strong enough to the handle the S&L; problem?

A We have some strong reservations about that. We feel the FDIC’s plate is too full and consequently the banking industry will suffer, from the lack of attention if nothing else. We’re already noticing that they are putting more and more of their examinations on a data base, or on a computer model, to monitor banks. And they’re moving to larger, longer periods in terms of physical examinations of institutions. This, of course, is not good for the banking industry, in my opinion.

Q. Why is that?

A. When you go into an examination, you’ve got to look people in the eye. You can’t tell it from a computer model. Figures can lie like the dickens. So you’ve got to go look at the character of the people and how they’re playing the game and get a feel for whether they’re up to something. That’s partly the savings and loan story: very weak supervision, very weak examinations. So the weaker the examinations become, the more likely there will be trouble in the industry.

Q. If the combined forces of the FDIC and FSLIC are spread too thin, will the door be opened again to the kind of sharp operator who has ruined banks and S&Ls; in the past?

A. I hope not. I think the sharp operator in the savings and loan industry is going to be brought into control, put on a leash considerably more than in the past. Whether it opens the door for operators in the banking industry to be a little more free in some of their moves, we’ll have to wait and see. I hope it doesn’t. But we’ve got other examiners helping in the banking industry that we really don’t have in the savings and loan. The Federal Reserve Board is more involved in the banking industry, and the state banking department is much stronger from the examination standpoint than the state savings and loan commissioner’s office.

Q. Who are the losers in S&L; rescue legislation now in Congress?

A I think the biggest loser ultimately is probably going to be the (trade group) U.S. League of Savings and Loan. And maybe the politicians because the special interests won’t be there to contribute to their campaigns or their PACs (political action committees), or at least not in the amount they have in the past.

Q. How about the taxpayers?

A. Oh, certainly, the taxpayers are going to be hit good.

Q. Are there any winners, any gainers in all this?

A Not really. It’s hard to look and see who really comes out ahead on this.

Q. Do you think the new legislation will restore public confidence in the banking system in general?

A. I think it will probably be a positive factor. I don’t believe that confidence in the banking industry has been too damaged, even though we’ve had an unusual number of bank failures and problems in banks. It has been so far overshadowed by the sick savings and loans. So I don’t think confidence in banks has been hurt. The savings and loans, I really don’t think they’re ever going to recover fully.

Q. Have S&Ls; outlived their usefulness?

A. In my judgment, that’s true.

Q. With the takeover this year of Lincoln Savings and Gibraltar Savings, two huge institutions in California, are we seeing a new wave of failures?

A. I don’t know if we’re seeing a new wave. What we’ve seen is the fact you can lose an awful lot of money very fast in some of these operations. Size does not seem to be a critical issue anymore in terms of making an institution safe. I don’t think that regulators have the same reluctance to move in on large banks and S&Ls; as they once did. The FDIC is possibly more aggressive than FSLIC was, and I really think that’s partly because the FDIC is not as political. Unfortunately, the savings and loan industry has a long history of being very political.

Q. The S&L; industry would say the same about the banking industry, wouldn’t it?

A They used to say the savings and loan industry was always on the attack and the banking industry was always on the defense. The banking industry never went to Congress for anything they wanted to do; they always went there trying to protect their turf. The savings and loan was always trying to expand. I know in my own experience that the savings and loan industry is far more political than the banking industry.

Q. Regulators have adopted rules to curtail some of the freedoms that resulted from deregulation. Will there be more attempts to cut back on the powers granted banks and S&Ls; to make a wide array of investments with depositor funds?

A. I think they’re going to have a bit more restrictions. I think we’re going to go through a period where the introduction of new products or new services, which has become a normal event, is going to be very closely scrutinized by regulators. We can see that developing.

Q. Accounting methods seem to be cropping up more often as an issue at seized institutions. Why?

A. I think the operators of those institutions were taking advantage of all the loopholes that regulators provided them. The Federal Home Loan Bank Board has a Mickey Mouse accounting setup that, in my opinion, was designed to allow a savings and loan to present a better financial picture than what it really had. And I think the seized S&Ls; took advantage of the rules.

Q. What would you have done differently in the last few years to get the S&Ls; out of the mess they’re in?

A. I would have restricted, severely, their entry into non-traditional areas of lending and investing. They were totally unequipped to deal in that area. You can’t tell me a savings and loan guy was equipped to go to Texas and operate a cattle ranch or whatever else they got themselves involved in. That’s an area that should have been severely restricted, and I would have done that, if I’d had my say. That goes for banks too, by the way.

The other thing is that at one time, the savings and loan was a very well-capitalized industry. I would have certainly insisted on maintaining reasonable capital requirements. A number of savings and loans got hurt in the early ‘80s when the interest rates went against them because they had booked a lot of long-term, fixed-rate loans at low rates while rates on deposits soared. That again was somebody really not paying attention to what was taking place in the financial area.

Q. Some banks and S&Ls--Lincoln; Savings is the most recent example--have been raising capital through corporate debt. Is publicity over the bond problems at Lincoln going to create problems for the other institutions in raising capital this way?

A. Yes, it is. We’ve gone through that in the banking business in prior years. Fact is, the first time we tried to sell holding company notes through Bank of America, the SEC began restricting them. Then in the 1960s, we had a little experience with Beverly Hills Bancorp. They sold notes and then bellied up, failed. And of course the noteholders wound up yelling bloody murder about the fact that they thought they were getting insured deals because they had bought them at Beverly Hills National Bank. The controller’s office really started getting concerned. Then on top of that, the FDIC wound up having to cover certificates of deposits that were sold off book by a New York bank. So the banking authorities have been very tough on allowing the distribution of notes over the counter to bank customers. Now we can look and say the savings and loan industry was quite a few paces behind the banking industry, but it seems like FSLIC and the others should have learned a lesson.

Q. Have any bank or S&L; holding companies withdrawn or held off plans to raise capital through debt because of Lincoln?

A. I don’t think so. We do know that some pretty good-size institutions are thinking of debt as a means of bringing in capital. There are institutions now that are looking at debt as a meaningful capital-raising avenue. It’s proper if used right. Of course, the Federal Reserve Board has said recently they don’t want too much debt in relationship to the capital adequacy.

Q. What would you do in the future to prevent failures of banks and S&Ls;?

A I think there are several things that need to be done. First of all, we have to have better informed directors for management. It starts there. Good banks start with good directors. What do I mean when a say a good director? It’s a properly informed director who carries out his responsibilities in a prudent and proper way. If you do that, then there’s little chance that a bank will ever get in trouble. And the same thing would apply to savings and loans. I believe there are good indications now that we are getting a more conscientious, better quality director. And good directors hire good management. We’ve said a number of times that in our experience a board of directors will never hire a management beyond the quality and capacity of the board of directors. A weak board will hire weak management. A self-dealing board will hire management that will accommodate them.

Q. What else would you do?

A. The monitoring can be improved. We criticize the banking regulators regularly on the basis that their examiners can’t smell anything. In the old days, the bank examiners could sense when things weren’t right, and you didn’t have to point things out to them. They would find them. The examiners today can’t smell anything, and things have to be pointed out to them. Then, when things are finally pointed out to them, they have that herding instinct. They jump on it full bore and they overkill sometimes. So we don’t have as good examiners.

Q. Why is that?

A. It’s primarily because they’re being trained in a technical sense and not in the judgmental aspects. We suggested to the FDIC several years ago that they should hire retired bankers who have been on the firing line and could go in and know whether a loan is going to be collected or not. Get somebody in there who knows whether you’re going to get it back, how much you’re going to get back, what you have to do to get it back and when you’re going to get it back. You don’t get that with an examination. All you get is whether they technically comply with the so-called rules, statutes, regulations and so on.

Q. You say you’re seeing better management. Is that because regulators at the state and federal level are beginning to scrutinize the applicants more?

A. They’re certainly restricted on getting into the business. In our state, we’ve gone through the process of where we’re weeding out the weaklings, so consequently what is left is the better ones that can survive. And if regulators don’t create another batch of weaklings, then you’re absolutely going to have a strengthening. That has taken place. But I think the bankers, the new breed of bankers, are much more equipped than the old ones were to deal with the competitive factors and the changes that are taking place in the banking environment.

Q. Do you see any bright spots in the banking industry?

A I don’t mean to be altogether negative. I look at our independent banks and I think they’re doing great. They’re coming on strong, and we’re going to do everything we can to help them. They’re learning to play the game. Fact is, they went up quite a bit last year in terms of their market share, and the results of their performance were just outstanding. And it’s going to be another good quarter. They are shining. I think that’s going to continue because they are able to target and rifle shoot and move in an area where others might be confused and might be muddling along. As I keep telling them, for every adversity, there’s an opportunity.