Feds did something right in handling of Great Meltdown
Bank closures have slowed to a trickle. The monthly list of regulatory actions by federal regulators against banks is a third of what it was a couple of weeks ago. The country’s banks are ponderously, but positively, moving out of the industry’s worst crisis since the Great Depression.
Sure, the mess has cost taxpayers a bundle, but it could have cost a lot more. Could it be that the feds have done something right? (Oops: That last comment might have made a lot of readers turn to the sports section.)
In the 1980s deregulation, and lax enforcement of the remaining rules, caused hundreds of savings and loans in the U.S. to become insolvent. Regulators acted swiftly, after virtually not acting at all, to shutter the failed thrifts and transfer their assets to a government entity, the Resolution Trust Corp., for disposal.
And dispose it did. In one of the greatest yard sales in history, real estate assets and loans were sold at a fraction of their current value, and at a truly miniscule amount of their worth just a couple of years later. Suffice to say that the rich got very much richer. It was probably the greatest hit to the pocketbook of the American taxpayer ever, in terms of cost-benefit. At least in the instance of World War II, we won the war and the basis of a worldwide economy, with unprecedented living standards, was created. It’s almost an untold story, because Congress, which was complicit in the debacle, did a masterful job of sweeping it under the rug.
This time around, a bit more restraint is evident. Regulators don’t have as much wiggle room as might be supposed because of statutory limitations, but some institutions have been allowed to twist in the wind until a purchaser of the bank or a merger partner can be found.
Often, if new problem assets weren’t coming on line, and a bank wasn’t making new loans that could go bad, an institution has been allowed to operate with the current staff and management because no immediate danger was posed to the Deposit Insurance Fund. It was more economical to let the people in place work to sell the troubled assets and serve existing customers than overloading government agencies that would perform many of those tasks less efficiently, with greater cost.
Many of these banks have ultimately been purchased or merged into healthy institutions. Some have even raised new capital, although it’s unclear how they’re going to be profitable without a strong partner or drastic restructuring.
Sure, concessions have been made to attract the white knights, and maybe on occasion they’ve been overly generous. But there haven’t been the giveaways that were prevalent back in the days of the RTC. There are true stories of the agency actually negotiating sales prices of foreclosed real estate downward.
In the instances where the bank stayed intact until absorbed by a healthy partner, disruption to the community was minimized, and local jobs were preserved. There have been ancillary economic benefits to a policy of selective bank closures.
So maybe the feds have done a thing or two right in their response to the Great Meltdown. Take heart though, folks: The political poobahs will continue to trip over their own suspenders more often than not.
Pat Dalrymple is a valley native. He’s been in the mortgage and banking business since 1961. He’ll be happy to answer your questions or hear your comments. His e-mail is firstname.lastname@example.org.
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