VIEW FROM WASHINGTON / JAMES RISEN : George Bailey Would Have a Tough Time Under Today’s Strict Thrift Regulations
It’s Christmas Eve, and George Bailey, chief executive of the Bailey Bros. Building and Loan of Bedford Falls, is in deep trouble.
His tiny, family-run S&L; has been on the ropes for years, yet Bailey still makes loans to friends and neighbors with little or no collateral or hope of repayment.
What’s worse, the Bailey Bros. thrift has gone out on a limb and invested most of its money in a real estate development--Bailey Park, a speculative project on raw land on the edge of town.
All the while, Bailey has been losing ground to his cross-town rival, Mr. Potter. Potter’s well-capitalized commercial bank puts the Bailey Bros. to shame with its stringent lending standards .
By contrast, George Bailey’s drunken Uncle Billy serves as chief financial officer, with little regard for the safekeeping of customers’ deposits.
Finally, disaster has struck. Uncle Billy has misplaced $8,000--all of the thrift’s liquid capital. Mr. Carter, the bank examiner, is waiting to conduct his year-end audit just as George and Uncle Billy begin a frantic search for the cash.
Anyone who watches even a bit of television during the holiday season knows this is the dire scenario of Frank Capra’s classic Christmas film, “It’s a Wonderful Life.” Couch potatoes across America can recite the movie’s happy ending.
But how would today’s federal bank regulators handle the crisis in real life?
Simple, says John Downey, who, as deputy director of the Office of Thrift Supervision, is Washington’s man in charge of thrift examinations. The feds would shut the Bailey Bros. down. Right away. And probably sell the institution to Mr. Potter--no matter that Bedford Falls might turn into Bailey’s nightmare vision of a slum-infested Pottersville. “It would be a lot different today,” says Downey. “It would be quick, swift and probably lack compassion.”
Downey says he is a fan of the movie, but he knows his federal regulations. The laws under which regulators operate these days are a lot tougher than they used to be--one of the enduring legacies of the S&L; and banking crises of the 1980s and early 1990s.
Above all, federal regulators now must strive to protect taxpayer interests. That means selling off or liquidating failed institutions quickly to protect federally insured deposits and thereby limiting government costs in a bank or thrift bailout.
The new rules are so stringent that they give regulators little leeway to consider the plight of an honest man like George Bailey or how his institution’s demise might affect the community. Those can be only secondary concerns.
Downey has stepped into so many failed S&Ls; that he can describe precisely what would happen to the Bailey Bros.
“First of all, we would have had more than one examiner in there,” Downey said. “We would have been questioning a lot of things going on in this institution. . . . We like to see cash transported in something more than a paper bag. George Bailey is a nice guy, but probably shouldn’t be running a financial institution.”
When the shortfall was uncovered, “we would probably convene a meeting of the board of directors, and then we would issue a cease-and-desist action to prevent them from doing anything until we ruled whether or not it was insolvent.
“We would try to keep him in business, but if you have an institution that is insolvent--and I think this would have been--you don’t have the discretion. You would have to shut them down.”
Once the Baileys’ thrift was declared insolvent, the government would quickly look for buyers. If none could be found, the S&L; would be turned over to the Resolution Trust Corp., which would sell off its assets and real estate holdings.
Either way, Mr. Potter--the only man in Bedford Falls with any money--would probably come out the winner.
*
The federal government’s handling of such cases wasn’t always so impersonal. In the 1940s, when the movie was made, thrift regulators operated under rules that allowed them much more flexibility, Downey noted.
Now, he said: “We have to intercede even before (thrifts) are technically insolvent.”
Of course, broad discretion and lax regulatory policies ultimately brought America the savings and loan crisis. Yet today’s laws are accelerating consolidation of the financial services industry around nationwide and super-regional banking organizations such as Bank of America and Charlotte, N.C.-based NationsBank. It’s enough to make one of Capra’s populist movie heroes cringe.
How to balance it all out? Maybe the answer lies with President Clinton’s initiative to seek tougher enforcement of the Community Reinvestment Act.
Clinton’s plan would allow big banks to continue gobbling up smaller ones, but would tighten the rules so the survivors would have to invest and lend money in cities where they have acquired smaller institutions. That would offer some protection to towns such as Bedford Falls.
“I think you can assume that Bailey Bros. was operating in a low-income or moderate-income area,” said Downey, “and so, Mr. Potter would be evaluated on lending practices within Bedford Falls.”
