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Banking on Bill Seidman : He’s Not Blow-Dried. He Doesn’t Talk Gobbledygook. And in His Mission to Save America’s Banks, He’s Even Faced Down George Bush.

<i> James Flanigan is a business columnist for The Times. </i>

BILL SEIDMAN’S FATHER HAD WARNED him about banks back in 1929. “I can still remember him taking me down to the little bank where we put our dollar a week and forcing me to take my money out and put it in government bonds,” says Seidman, who was 8 at the time. “I hated it because all the other students had their money in the bank.”

Nor was it a foregone conclusion that father knew best. Frank Seidman, co-founder of the accounting firm Seidman & Seidman, had become convinced in 1928 that the stock market would fall and the banks would fail. So he had sold short in the stock market--sold borrowed stock, betting that prices would decline and he could repay the borrowed stock with lower-priced shares and profit from the difference.

Initially, it looked to be a losing gamble, as stock prices continued to rise. “He was near busted by the middle of ’29,” his son says 62 years later. But when the market crashed in October, 1929, Frank Seidman was one of the few who made money.

And the early 1930s proved him right about the banks, too. “As he predicted,” Bill Seidman recalls, “the bank eventually closed and the other students got nothing, but I had my money.” That bank in Seidman’s hometown of Grand Rapids, Mich., was only one of 9,096 banks that failed between 1930 and 1933, taking with them the savings of millions because there was no federal deposit insurance.

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Today, L. (for Lewis) William Seidman heads the Federal Deposit Insurance Corp., the agency created by Congress in 1933 to protect bank depositors. And he knows all about failing banks. In the five years that he has run the FDIC, more banks have gone under than in the previous 50 years of the agency’s existence, and not all of the failures have been the smaller, less robust institutions.

Seidman’s job essentially has been to put out fires while calling attention to a dwindling water supply. The FDIC’s insurance fund, which backs $2 trillion in bank deposits, has shrunk to less than $9 billion. And the rescue in January of the Bank of New England will cost the fund billions more, making Seidman’s pleas to Congress for additional financing for the FDIC all the more urgent.

The situation is critical. By one government estimate, 374 banks currently have inadequate finances and could fail at any moment. Seidman is asking for emergency authority to borrow from the Federal Reserve to bring the FDIC insurance fund up to $70 billion, promising that the banking industry would repay such borrowings. Fed officials and many in Congress are balking, fearing that taxpayers will be hit with a massive bailout of the banks on top of the hundreds of billions they are paying in the savings and loan crisis.

Still, one way or the other, it’s certain that the FDIC will get its money this year. Not only is Congress aware of the dangerous situation, but, by and large, it trusts Seidman. That’s why in 1989 it handed him additional responsibility by naming him chairman of the Resolution Trust Corp., the receiver and liquidator of bankrupt S&Ls.; And Congress has watched without undue criticism as he has built the RTC into a big government department, with 5,400 employees, including 500 staff lawyers. The government chose Seidman to clean up the mess left by a great binge of borrowing and deal making in the 1980s because it saw him as a blunt straight-shooter in a tangle created by political bungling and commercial fraud. Having just turned 70 on Monday , but fit and vigorous enough to bicycle three miles to work most days, Seidman has become the superbureaucrat responsible for disposing of the bad loans, flawed junk bonds and other debris of the most expensive financial debacle in the nation’s history while trying to prevent an even worse disaster with the banks. No insured depositor has lost a penny in these twin crises, but Seidman and others realize that the indirect costs in misallocatedresources have been tremendous.

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Given his age, Seidman recognizes that he’ll observe the effects of today’s actions in retirement “from Hawaii or New Mexico or somewhere.” But he hopes his efforts will initiate “moving the banking system to modern times,” a reference to looming legislative battles over allowing banks to sell stocks, bonds and insurance and to branch nationwide.

Just as important, he could restore respect to regulation, a concept that has often been derided and neglected by politicians and financial experts during the past decade. Seidman believes that government has an important role to play in business, unlike many Republicans who say it only gums up the free market. He could demonstrate that although inept oversight helped produce the S&L; scandal, intelligent regulation could save us from a similar horror with the banks.

SEIDMAN, WHO FAVORS TURQUOISE AND silver belt buckles of native American art with his business suits, doesn’t behave like anybody’s image of a Washington seat-warmer.

His daughter Tracy, who manages the family’s working cattle ranch in Wagon Mound, N.M., fondly calls her aggressive, high-energy father, “Wild Bill.” She recalls how ornery he got last Christmas, one month after undergoing a hip replacement. “He was on crutches but restless because the doctor wouldn’t allow him to ride a horse or go skiing. So he asked me for a chain saw and went out cutting small cedar trees, crutches and all.”

Seidman doesn’t talk like a bureaucrat, either. In a celebrated 1989 quip, he dismissed a Treasury Department suggestion that depositors be taxed to pay for the S&L; cleanup as “the reverse toaster theory--instead of the bank giving you a toaster, you give them one with your deposit.” Ultimately, of course, Congress decided to make all taxpayers pay for the S&Ls.;

Seidman doesn’t minimize problems. Recently, he told a congressional hearing that many current banking problems result from practices “such as lending on raw land, which would have been illegal” under rules that Congress repealed in 1974. Last year he testified: “We’ll be a lucky nation if we can dispose of the backlog of insolvent S&Ls; in 10 years.”

Such departures from happy talk disturb the Bush Administration. Last June, the Administration was so angered by Seidman’s frank assessment of the scope of the S&L; bailout that the White House tried to maneuver the FDIC chairman out of his job. President Bush named Seidman’s successor--William Taylor, a former Fed official now at the FDIC (who may yet get the job)--while avowing that he wasn’t trying to push Seidman into retirement. And White House Chief of Staff John Sununu suggested in anonymous press leaks that S&L; bailout costs were growing because Seidman was an “empire builder.”

It was not the only angry encounter Seidman had last June. While vacationing at the New Mexico ranch, he mounted a familiar horse for a routine ride when the horse “started bucking and it became obvious he wasn’t going to stop. So I tried to get off and caught my foot in the stirrup. And that parted my pelvis, knocked out my hip and tore the main artery in my leg.

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“It was close,” says Seidman today, sitting relaxed in front of a painting of wildflowers that hangs in the chairman’s conference room at FDIC headquarters. “I lost 40% of my blood internally.”

But Seidman survived the accident and the White House pressure, too. “I decided it was not appropriate” for the head of an independent government agency to be pushed out for political reasons, Seidman says. So he talked to President Bush, who, he says mildly, “did not support Gov. Sununu’s view and who just talked about some other things he wanted me to do.” Sununu, a former governor of New Hampshire who still uses that title, has declined to comment.

Seidman will retire, all right--probably in the next few months and definitely before his term expires in October. Meanwhile, showing up the White House did him no harm in his relations with Congress, where he’s renowned for his tactical skill at winning appropriations and protecting his agencies’ prerogatives.

The secret of his influence, explains Thomas Ashley, a former 13-term Ohio congressman who now heads a bank organization in Washington, “is that he’s a straight talker, smarter than 98% of the people he does business with, and he’s public-service minded.” Says Sen. Donald Riegle (D-Mich.), head of the Senate Banking Committee: “He’s a serious student and practitioner of government, academic and scholarly. You don’t often get that in a public official.”

Academic and scholarly may not be the words Seidman’s rough-and-ready manner bring to mind, but his credentials are genuine. A Phi Beta Kappa graduate of Dartmouth, Seidman also has a law degree with honors from Harvard and an MBA from Michigan.

His attraction to public life dates from the early 1960s, when he ran for Michigan state controller on Gov. George Romney’s ticket. Romney won; Seidman lost but later headed fund raising for Romney’s brief try for the Republican presidential nomination in 1968. That campaign collapsed after Romney said he felt “brainwashed” by a Johnson Administration briefing on Vietnam. “We sat around wondering what to do after he said ‘brainwashed,’ and then it didn’t matter anymore,” Seidman recalls.

After completing his first career, building the family accounting company into a national firm, Seidman arrived in Washington in 1974 as assistant for economic affairs to his friend from Grand Rapids, President Gerald R. Ford. Seidman was a senior member of a remarkable class of officials who went to Washington in that Administration and are now government leaders. Dick Cheney, secretary of defense; Brent Scowcroft, national security adviser; Carla Hills, chief trade negotiator; Alan Greenspan, Federal Reserve chairman; James A. Baker III, secretary of state, and Roger Porter, presidential assistant for economic policy, all worked with or for Seidman back then.

“I have the highest admiration for him and for the important job he’s doing,” Ford says of Seidman today. Seidman and his wife, Sally, are close friends of the Fords. Seidman and former First Lady Betty Ford attended the same Grand Rapids high school.

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Washington impressed Seidman. When his first stint in government ended, he founded a nonprofit institute that teaches graduate business students and corporate executives how the town really works. “Sometimes you hear business people curse Washington,” Seidman says. “But aside from productivity, government is the most important factor to the bottom line.”

It’s an unusual sentiment for a businessman, but behind it lies a shrewd appreciation for Washington’s constant politicking. (He named his Irish wolfhound Proxmire after former Sen. William Proxmire, a Wisconsin Democrat and another government gadfly.) Where others are repelled, Seidman hears democracy singing. “This government of ours doesn’t so much govern as decide among interests,” he declares. “A huge amount of bargaining and compromising is going on at all times. But more compromising went on at the Constitutional Convention. It’s the only way to run a country like this.”

WHEN SEIDMAN TOOK THE TOP job at the FDIC in 1985, he knew it would be tough. The 19,500-member agency had become a hot corner when larger banks had begun to fail in the 1970s, when institutions like Franklin National and San Diego’s U.S. National went under. By the mid-1980s, things were getting worse.

Seidman’s predecessor, William Isaac, had dealt with the collapse of the giant Continental Illinois Bank & Trust. The FDIC began taking over banks and trying to find new management to run them or other banks to buy them. Moreover, it was insuring not only deposits of $100,000, as the law stipulated, but also much larger global money-market deposits that the U.S. government decided had to be honored to protect the world financial system.

That determination, that some banks were “too big to fail,” added to Seidman’s problems because it was depleting the FDIC’s insurance fund. Once, there had been $1.50 in the fund to back $100 of insured deposits, but by the late ‘80s the ratio was less than $1 per $100 and dwindling. Currently, with more big banks having failed in Texas and Oklahoma, it’s about 40 cents. Seidman knew what was happening : It was the breakdown of the system that had been ushered in with the Depression.

Before the 1930s, U.S. banks went bust in recurring financial panics or because the banker absconded with the funds, as in John Ford’s “Stagecoach.” If depositors lost money, those were the breaks. But the Depression punished so many depositors that something had to be done to restore public confidence in the banks. So Sen. Arthur Vandenberg, a Michigan Republican, and Rep. Henry Steagall, an Alabama Democrat, invented deposit insurance. When it began in 1933, the FDIC insured savings deposits of as much as $2,500--a limit that has ballooned to $100,000 per account today.

Along with insurance came other regulations--such as ceilings on the interest that banks could pay depositors--to prevent the competition for deposits that had driven banks to imprudent practices in the 1920s. Interest rates on loans were effectively controlled by Federal Reserve policy. The thinking : If the government was going to insure deposits, it was going to control the business.

And for four decades, the system worked like a charm. Bank failures were few, bank openings many. Even today, the United States has more banks, at 12,000-plus, than any other country. “To some extent,” Seidman says, “the 1930s reform created a system that was much more responsive locally than any other system in the world--and that has been very helpful.” But to some extent also, “the 3-6-3 rule applied,” Seidman says, referring to the old joke about the job of a banker: Pay 3% on deposits, charge 6% on loans and be on the golf course by 3 p.m.

Then, in the 1970s, distant financial events began to affect the U.S. economy, and its banks. In 1969, the Federal Reserve tried to rein in inflation by restricting domestic lending, so the larger U.S. banks reached out to bring in a growing supply of dollars trading overseas--called Eurodollars--and made an end run around the Fed’s restrictions.

Today, interest rates are governed by world money markets that deal in $500 billion worth of various currencies each day, a sum 100 times greater than the U.S. gross national product, or the total of world trade in goods and services. “The world market took control of interest rates,” Seidman explains, “and that ended the protected period for U.S. banking.”

Other changes compounded the banks’ difficulties. Inflation rose with hikes in the price of oil, and suddenly the 4% interest that banks could pay on insured deposits looked puny. Depositors rebelled, taking their money out of banks and S&Ls; and putting it into the new money-market funds, which paid a higher rate of interest but were not insured. It marked a turning point. “Insured deposits, which were the most efficient way to gather lendable funds and deliver them to borrowers, were no longer competitive,” says Michael Morrow, a consultant in the bank consulting firm Alex Sheshunoff & Co.

One statistic speaks volumes: At the end of World War II, banks held 60% of the financial deposits in the United States. Today they hold less than 30%. Bank loans now comprise less than a third of borrowings by business as big corporations borrow more cheaply in commercial paper markets, and finance companies such as General Electric Capital lend to retailers and appliance dealers, taking traditional business away from banks.

As customer lists shrank, banks reached down to less credit-worthy borrowers. “Banks have made commercial real estate a bigger part of their business in recent years as they have lost other customers,” Seidman testified recently to Congress. “And now they’re in trouble in the weakest real estate markets in many years.” That “trouble” is why Seidman wants massive new financing for the FDIC.

At the same time, he is adding his voice to the Bush Administration’s program for bank reform. This would allow banks to open branches in every state--they are restricted now to a cumbersome system of separate offices outside their home states--and to enter non-banking businesses, such as insurance, from which they’re now prohibited. But there is opposition in Congress and a general nervousness in Washington lest freeing the banks should lead to another disaster like that of the S&Ls.; There is even bickering among Administration officials over the plan.

“The savings and loan crisis resulted from a massive breakdown in government supervision,” says Isaac, Seidman’s predecessor. “Everything that could have been was done wrong.” Briefly, the nation’s 2,500 or so S&Ls--a; restricted form of finance company limited to home mortgages--had suffered an outflow of deposits in the 1970s as depositors fled to money funds. Many S&Ls; began to lose money as even regulated deposit rates rose above what the S&Ls; were earning from mortgage loans written years previously.

But Congress’ solution to their problems was a lighted match to gasoline. Congress deregulated interest rates, freeing S&Ls; to bid for deposits and then allowed them to go beyond mortgages and lend to other businesses in hopes that they could turn a profit. It was part of the enthusiasm of the early 1980s for deregulation and unfettered markets.

The S&Ls; were not free-market companies, however. They could attract deposits because they had government-backed insurance. Thus, when the newly energized S&Ls; lent to questionable businesses, the Federal Savings and Loan Insurance Corp.--a defunct and inept regulatory agency that was the thrift industry equivalent of the FDIC--bore the real risk. It and the taxpayers.

Now the taxpayers have been served the bill, which may run ultimately to $400 billion. And that’s only the direct cash costs; indirectly the economy pays in squandered dollars. For example, Seidman says, Resolution Trust is able to sell most of the 162 golf courses it inherited with failed S&Ls;, “but we’re getting more marinas than we can sell.”

The image is stark: The nation is in recession; there is a shortage of capital for small businesses and for municipal needs such as public libraries and a tightness in school budgets. But thanks to the S&L; debacle, there’s a surplus of golf courses and marinas.

Seidman says that bank reform mustn’t make the same mistake. He favors rigid regulation for insured deposits: “We have suggested that banks be under much stricter supervision as to what they can do with money backed by federal deposit insurance; it should be concentrated only in the most conservative activities.”

But he would allow banks to go into insurance or securities brokerage or any other kind of business dealing with uninsured deposits--meaning financing raised in the bond or commercial paper markets. Seidman’s thinking is influenced partly by the fact that he wants banks to be able to compete on a level playing field with other financial firms.

In his mind, banks should have been able to offer a money fund, without government insurance, rather than lose customers. “The clearest illustration is the railroads. We kept them out of shipping and airlines, and they all went broke because their customer base eroded,” he says. “We can’t afford to have that happen to the banks.”

Seidman also wants U.S. banks to regain ranking in the world with the Japanese and European banks that now dominate lists of the world’s largest. Citibank is the only U.S. bank now among the 25 largest. “The foreign banks can do universal banking,” he says, “and provide customers with services across the board. We have to allow our banks to be competitive.”

Although most bankers applaud Seidman, many also recognize such sentiments as superficial. The strongest global U.S. bank today is not large, loss-racked Citibank, but J. P. Morgan, which has husbanded its resources and is highly profitable. And if it’s not Morgan, most bankers would acknowledge North Carolina’s First Wachovia, or Ohio’s Banc One, as the strongest.

“Seidman’s doing one hell of a good job,” says Tom Frost, chairman of Cullen/ Frost Bankers Inc., a medium-sized company in San Antonio. “But that Administration program he’s pushing is off base. It says big, big, bigger is better--but what about smart?” Anyone who survived the terrors of Texas banking in the ‘80s knows, Frost says, “that if it grows too fast, it’s a weed.”

Some of Seidman’s statements about banking lead experts to question the depth of his knowledge. “He’s fundamentally an honest guy who’s in over his head,” says Martin Mayer, author of several respected books on banking. But others suggest that Seidman knows more than he can say, that, unfortunately, the banks’ difficulties in the aftermath of the ‘80s are so great that there’s no practical solution to the problem. “So Seidman has to vamp, to buy time for loans and real estate prices to work themselves out--a process that generally takes four years,” says a banker who prefers to speak anonymously. “It’s a political job, and Seidman does it well.”

SEIDMAN’S FIRST JOB SELLING government property proved frustrating. His assignment at the end of World War II, when he returned from service on a destroyer in the Philippines, was to sell surplus Navy property that defense plants had been using to turn out war materiel. But he got angry when he saw a contractor trying to get too good a bargain at the government’s expense. “I saw them buying for brass what I thought was worth a lot more, so I complained,” he says.

“As a result, I was transferred to another account. I suppose I was still full of the spirit of defending the United States on land as on sea,” he chuckles.

It was at sea that Seidman--as a young ensign, a year out of college and newly married--commanded a destroyer in the battle of Surigao Strait. The incident earned him a Bronze Star and had, he says, a deep effect on his attitude toward life. His ship came under heavy fire, some of it mistakenly from other American warships, but escaped harm. Seidman was grateful. “When I got back, I tried to make sure I did what seemed to be appropriate,” he says.

After earning his law degree and his MBA, he went into the family business. Never particularly drawn to accounting, he nonetheless saw that a local accounting company had to grow to survive. When he became managing partner of Seidman & Seidman in 1969, he built it into a national firm by stitching together more than 30 mergers of similar family firms. Combining family businesses is no easy task. “You know, accounting firms are all rigged so that the top three guys get everything,” Seidman says. “So you had to persuade people that you knew what you were doing and were going to treat them equally.”

Evidently, he did it well, accounting experts say, because the firm--now named BDO Seidman and part of a Brussels-based company with more than $1 billion in annual revenues--has survived while others have disappeared. Seidman sold his interest, and there is no longer a family connection to the firm.

Seidman served with the Ford Administration from 1974 to 1977, then became chief financial officer of Phelps Dodge, a Phoenix-based copper producer. In 1977 he founded Washington Campus, an organization that each summer educates about 100 business students on the ways of government. Member universities include Arizona State University, where Seidman served as dean of the business school from 1982 to 1985, UCLA and UC Berkeley.

As he had brought academe and government together in Washington, Seidman brought business into closer touch with Arizona State. “He initiated our council of 100 advisers from among the top chief executives in Arizona,” says interim dean Lawrence Penley. “He reached out and created a council emeritus of advisers from among the many CEOs of major corporations who have retired or come to Arizona for the winter. And he pushed the school to go out and do research in real situations, such as our project on how to market services.” In recognition, the school named its research center the Seidman Institute.

Bill and Sally Seidman have six children, some of whom recall “a man on his own course,” “a no-nonsense father,” even “a very driven man,” although gentler than he seemed. On family skiing trips, Dad pushed hard, and his competitive streak came out in mean polo matches.

In government, Seidman also relishes competition and the public eye. “It’s a combination of satisfaction in serving the public and satisfaction of being able to prove you can operate in the big tent. This is the main tent. There are a lot of other big tents, but this is the center,” he says.

People who have worked for Seidman talk about his energy and drive. “Nothing passive about him,” says an FDIC staffer. “But he’s very loyal,” says Kenneth Guenther, who worked for Seidman in the White House in the 1970s and now heads a Washington group that represents small banks.

Despite his work ethic, Seidman has a strong artistic side. His mother was a sculptor; a work of hers is in his office. His wife, Sally, paints, and daughter Tracy is an artist whose basket works have been exhibited in Santa Fe. And Bill Seidman has become adept at making mobiles. “He knew Alexander Calder,” says daughter Carrie, a ballet dancer and owner of a dancing school in Montana. “For a while, he copied Calder, but now he experiments with his own materials and makes mobiles for his grandchildren.”

THE OCCASION WAS A PARTY at former President Ford’s house in Rancho Mirage. Seidman gave a businessman a demonstration of how government can respond to private initiative. “You think the Resolution Trust is doing a good job?” the businessman asked accusingly. “Well, I’ve been trying to buy the local Ramada Inn from the RTC. It’s asking $38 million and I’m willing to pay, but I can’t get them to close the deal.” Whereupon the man pulled a check for $38 million from his pocket.

“Give me the check,” Seidman said coolly.

“We had a very good discussion,” Seidman says. But, more than a month later, the deal still hasn’t closed; the RTC is awaiting the appraisal necessary before it can sell without a bidding process. “We have to teach a government organization to be a sales organization, and that is a very difficult procedure,” Seidman observes.

Given such a pace, and Seidman’s imminent retirement, what are the chances for landmark banking legislation? Opinions vary, and the lobbying will be intense from more than a dozen organizations representing segments of banking and finance. There are the small banks, powerful because every member of Congress has a politically active banker in the home district; the small banks’ main goal is to retain the most generous deposit insurance.

Then there are the bigger, regional banks, such as Wells Fargo and Bank of America. They want interstate branching; some want entree to other businesses; some are less eager. Finally, there are giant holding companies, including American Express, Chase Manhattan, Ford and others that want all financial services open to all comers. The lobbying is energetic, the kind of politicking Seidman admires.

And in the end, Congress will probably debate for another year the idea of allowing banks to open branches interstate or enter new businesses. Deposit insurance for $100,000 per individual per bank, with an additional $100,000 in a retirement account, will be retained, but insurance will probably be curtailed for big institutional deposits. And it’s certain that the FDIC’s insurance fund will be beefed up this year in some fashion and that regulators will be given greater power to intervene sooner in troubled banks.

Seidman, who plans to write a book on his government service when he retires, will have been at least partly responsible for those reforms because he has been impressive in running a government agency and, more, has given the job a dynamic image. The derisory figure of the do-nothing Washington bureaucrat has been replaced by plain-talking, hard-riding Bill Seidman, who is finishing up a dirty but critical job.

Seidman notes the increasing role of government. “There is no free market--only markets that operate freely with proper government control,” he says. “That’s why so much of international competition is more like a barroom brawl than a prize fight. And why government has become more important in our lives.” An odd sentiment for a Republican, perhaps, but oddly not for Republican Bill Seidman.

William Seidman’s Headaches

S&Ls;

* The Resolution Trust Corp., the government agency formed in 1989 to handle the S&L; bailout, has ballooned to encompass 5,400 employees, including 500 lawyers. * “We’ll be a lucky nation if we can dispose of the backlog of insolvent S&Ls; in 10 years,” Seidman says.

* The RTC has paid out, Seidman says, about $100 billion to make good on deposit insurance at more than 500 failed S&Ls.;

Banks

* Today, U.S. banks hold about 30% of the nation’s financial deposits, half the percentage they held at the end of World War II.

* The Federal Deposit Insurance Corp.'s insurance fund, which backs $2 trillion in deposits, has shrunk to less than $9 billion, with about 40 cents per $100 of deposits.

* In the five years that Seidman has run the FDIC, more banks have gone under than in the previous 50 years of the agency’s existence.


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