Worried about the spiraling costs of bank failures, officials in New Hampshire and neighboring states have persuaded regulators to stop lowering the boom on troubled institutions. This spring, New Hampshire’s Republican Gov. Judd Gregg has won tentative U.S. government approval for a plan which calls for the Federal Deposit Insurance Corporation to inject money into the state’s shakiest banks rather than shut them down. The FDIC would guarantee bad loans, put in new capital and then seek a buyer for the institution, retaining preferred stock in payment. The “open bank” resolution would stave off panic by allowing the banks to keep operating while buyers are being sought; it would also enable the FDIC to avoid dumping good assets at a discount. No deals have been done yet, but several are cooking. “We’ll have recapitalized all of our major banks by the end of this summer,” Gregg says proudly. Critics, however, charge that the new policy smacks of political favoritism.
The delay in action so far is striking. New Hampshire’s 78 banks collectively lost $411 million last year. Half its banking assets are now held by institutions that are insolvent but still open. Yet only three banks have been closed since 1989, while the FDIC has shut down 500 institutions elsewhere. This forbearance keeps officers and directors employed, but has a price: delay almost always runs up the cost. Why, then, is the FDIC trying open banking? Says David Cates, chairman of Ferguson and Co., a Washington bank-research service, “Something very political’s going on in New Hampshire.”
FDIC Chairman L. William Seidman acknowledges his new go-slow approach. “We are trying to. get the best plan,” he says. “In states like New Hampshire, where more than half the banking-industry assets are in trouble, rapid bank closings would depress the economy and trigger more trouble at banks that are now OK.” Where management is good, Seidman argues, it often makes more sense to keep a sick bank alive than to kill it.
Gregg, other New England governors and the region’s congressional delegation lobbied Seidman and Comptroller of the Currency Robert Clarke for almost two years to try open banking. Their cause may have been aided by independent pressure from White House chief of staff John Sununu, who once held Gregg’s job. Within the past year Sununu has tried to fire Seidman and has held up Clarke’s reappointment. Aides to all three have traced Sununu’s wrath in part to the regulators’ purportedly harsh treatment of New England. But a senior Sununu aide insists, “It’s a crock. It is ludicrous to think that Sununu has tried to do anything. on behalf of New Hampshire.”
Of course, politics is hardly foreign to the deposit-insurance mess. Backstage pressure on regulators to ease up on thrifts owned by campaign contributors brought about the fall of House Speaker Jim Wright in 1989 and encouraged California Sen. Alan Cranston to announce his retirement. But Gregg argues that the New Hampshire lobbying is different. He says no special contributions have flowed to anyone, although many bankers involved are long-standing Republican contributors. And in contrast to the Southwest, Gregg contends, New Hampshire’s failures involved mostly bad judgment, not fraud. Clarke, Seidman or both have attended special meetings with the six New England governors and the New England congressional delegation. “We’ve absolutely not contacted John Sununu on this,” says Chris Gallagher, general counsel to the New Hampshire Bankers Association. “Sure, I talk to John all the time - but never on this issue.”
The test of open banking is coming soon. The FDIC’s chief dealmaker, Harrison Young, has told executives of three of the state’s largest insolvent banks that they must merge and stiff their shareholders to get the FDIC to bring in its own and outside private capital. Seidman says regulators are applying the same approach in Connecticut, and will try it elsewhere. Yet Thomas C. Theobald, chairman of giant Continental Bank Corp., calls the plan “voodoo regulation” and says, “We shouldn’t be worried about keeping every bank in America in business.”
Politicians from New England think it’s about time. “I’ve made it damn plain that I want them to pay attention to the banking-industry situation up here because it’s killing our state, “says Sen. Warren Rudman, a New Hampshire Republican. “I’m sure they’ll be able to get better results with creative ideas than with the conventional closures they’ve been doing.” Taxpayers had better hope Rudman is right. The FDIC expects to borrow as much as $70 billion before the dust settles on the banking disaster. If open banking doesn’t work, the cost could be a whole lot more.
