A Man For All Seasons

I tune in to CNBC to watch Bill Seidman comment on the world`s financial events, I can`t help but be impressed with his candor and knowledge of the topic at hand-regardless of whose ox is getting gored in the process. Everyone is fair game in the World According to Seidman, whether you`re Alan Greenspan or Charles Keating.It`s ironic to be one of his business partners today, because it was not too long ago, as a bank president in the late eighties, that I thought our esteemed regulator had absolutely lost it. At that time, L. William Seidman was chairman of the FDIC and the newly formed RTC and spent most of his time convincing Congress to let loose of more than $150 billion of our tax dollars to solve the S&L and banking crisis. I understood the need to take control of this serious financial disaster and sympathized with his responsibility to shut down hundreds of banks and thrifts across the country. Yet it was his gung-ho spirit in getting FIRREA, FDICIA, and the Crime Control Act of 1990 passed that made me wonder whether Bill Seidman was a banking visionary or another politically appointed power monger. Collectively, the new laws gave the FDIC the power to freeze directors` assets and impose civil money penalties without the normal burden of proof common in standard business law. Directors either scurried to check their D&O policies or found plausible reasons to resign from bank boards. In retrospect, there`s little question that the legislation served its purpose of forcing bank directors to focus on their duties, but at the time, that didn`t help my opinion that Seidman appeared more interested in grandstanding than in finding legitimate solutions to the country`s financial institution problems.Today I wonder how one man can so badly misjudge the intentions and skills of another. After several years of observing his thought process and approach to business practices, I`m convinced that Seidman acted as a model civil servant who did what he thought was right-regardless of the political firestorm around him. And when it comes to knowing what he`s talking about, there is no mistaking why he continues to be a sought-after speaker and chief commentator on CNBC cable news network. Recently, Bank Director asked this top banking visionary a little about his past and a lot about the future of financial services.

Q: Nobody sued more directors or closed more institutions than you did as FDIC Chairman. I`m sure that some cases were no-brainers, yet as bankers, we heard about many fine-line cases. In hindsight, would you have done anything different?A: Well hindsight is always 20-20. So, yes, there are some things we could have done differently and these, you might say, are the things we learned as we went along. First and foremost was that once you know an institution isn`t going to make it, you`ve got to move on it promptly. In the early days, we fooled around praying and hoping something would happen that would save an institution. We spent a lot of time coming up with different strategies when we all knew, really, it had no chance and wasn`t solvent. That cost us a lot of money, and we would have been much better off to close the institution as quickly as we could. The second thing we learned at considerable cost was that the worst thing you can do, having taken over an institution, is to dismantle it and take the greatest pieces and try to sell them; manage others and then sell them. What we needed to do was to keep them all together with the hope that we could sell them all together. If we couldn`t, we could at least have them managed by the same people on a caretaker basis until they could be sold. I think those were the biggest things we learned that helped us to be more efficient and reduce the costs of failures.

Q: You have occasionally referred to yourself as a reformed regulator. What do you mean by that?A: A reformed regulator is somebody who wants to make friends with the people that he used to regulate. Therefore, it is very important to let them know that your present job as a TV commentator, or whatever it is, does not mean you approach matters the same way that you did when you were a regulator. Beyond that, the more you get outside and watch other regulators, the more you see that they tend to be more authoritarian than you would like to see. So I am a reformed regulator, and I attempt to make friends with those I used to regulate and atone for some of the sins that I committed when I was a regulator.

Q: It`s been said that during your handling of the S&L crisis, White House officials prevented you from meeting one-on-one with President Bush to discuss problems and solutions. Is that true? And, if so, what was it like to get interrogated all day by Congress and then shunned by your support team at the White House?

A: Let me begin by saying that I was appointed by President Reagan. The Bush White House wanted to replace Reagan`s appointees with their own appointees. So they didn`t start out supporting somebody in my position because their basic policy was to try to get rid of the Reagan people and get the Bush people in. But, even with that, the function I was carrying out, in terms of trying to help clean up the banking and S&L situation, was important to them and required their support. I had the misfortune early on to get on the wrong side of [former] Governor Sununu, who was the chief of staff. That came about primarily because the papers one day reported that his solution to finance the S&L crisis was to charge new depositors a tax when they opened an account to pay for insurance costs. I hadn`t heard this before, and a reporter called me up and asked what I thought of the idea. I said, Well, that`s really something new. You know, they used to give you a toaster when you opened a new account, now they are going to give you a tax. I guess we could call it the toaster tax. That comment probably got more PR than any other single thing I did in my entire term as chairman and, from all reports, it infuriated Sununu. He came into a staff meeting and said, Who does this guy think he is? We`re going to get rid of him, etc., etc. So I started out very badly with Sununu. And since he controlled who saw the president, when I asked to see the president to bring him up-to-date, I always ended up meeting with Sununu.

Q: That was also during the time when Citibank was having problems and the great debate of too big to fail was swirling around the offices of the country`s top regulators. Which side of the debate mirrored your thoughts at the time, and what kind of communications occurred with Citibank`s board and management?

A: There are certain things that I probably still can`t discuss because they were private and privileged. But I can say this much: Too big to fail really turned out to be out of our control. No major institution was closed by the FDIC without failing by itself because of a run on deposits. This was true of Continental Illinois; it was true of the big banks in Texas. So in a way, the too-big-to-fail issue surfaced because of institutions failing first, rather than us going in and closing them. Now, we had two major banks that, under any standards, if the regulators had wanted to, they could have declared them insolvent. One was Bank of America and the other was Citibank. And in the case of Citibank, the regulators had grave doubts about the ability of the CEO to run the company, so that gave us two alternatives. We could close the bank and get somebody else to run it and try to deal with the biggest failure in history, or we could try to get the bank to change its CEO, which we had the power to do by instructing the board. Or, we could try to work with the current CEO. I had no interest in removing [CEO] John Reed unless I knew who was going to replace him. To remove the CEO without knowing who was going to replace him, in my view, would have been a dour mistake. As things went along, you may remember, it got a very large investment from a Saudi prince, which gave it enough capital to get going. After that, it began to operate in a more efficient manner and, fortunately for everyone, it didn`t have to be closed. But it was very close, and I suppose if there had been an obvious candidate to take it over, something more drastic might have happened.

Q: Never having been one to sugarcoat anything, you were recently on record as saying that you fear for the uninformed banker. I believe that comment was made in reference to the changing pace of technology. Can you elaborate on that fear?

A: I think everyone has fears about the uninformed banker-particularly the uninformed community banker who doesn`t have the vast resources that the chairman of a multibillion-dollar institution has. So he has the great challenge of trying to keep up with the changes that are going on with much less staff help and so forth.If you look at how smaller banks are threatened today, one clear threat is technology-the Internet-nd the way that these changes are going to affect banking. Trying to keep up with technology is not just difficult, it`s almost impossible. Yet it has to be done, because clearly it is going to provide new ways of running the bank. If you step back a minute and ask what is the biggest single effect the Internet is going to have, the answer is that it is going to reduce profits. It will commoditize products in a way that is going to make it much more difficult to make a profit because the consumer will be better informed than he has ever been. The Internet is, first and foremost, a consumer weapon, if you will, or at least a tool consumers can use for finding out what they want and where to get it at the lowest price. So it puts great pressure on a bank to be the low-cost producer, because on the Internet you are dealing with a commodity, and price becomes the number-one concern. And if price is the number-one concern, then cost determines how you can be the low-cost producer. Looking at the Internet that way, one could say that it`s going to help consumers but it is not going to help producers; therefore, it is going to reduce margins and reduce prices. Everything that a bank provides is a commodity; that is, there is no product that one bank can provide that another bank can`t provide. They don`t have patented products and very few products are personalized. So the uninformed banker who doesn`t realize where the Internet appears to be pushing us is going to have tremendous difficulty competing.

Q: So what does a banker need to know to decide how to react to the Internet?A: There are really three models out there. One is what I call the Wells Fargo model, in which the Internet is not a separate business-it is just another channel for the customer to access its services. That`s one way to do it. The opposite way is to follow Bank One`s Wingspan model: a separate Internet bank. This creates a whole new kind of institution-a cyber-institution-which will be run as a separate business and that should, in the end, be low cost and, thus, profitable. Then there is a third alternative that you might call the specialized service Internet bank, which simply takes certain parts of what you can do on the Internet and turns those into separate services of the bank. For instance, writing home equity loans or writing mortgages that would be financed by separate CDs, and so forth. You isolate this specialized service so that you get the lowest cost and pass it on to the customer.Now, there will be mixes of all these, and the banker who is looking at the Internet will struggle with the fact that there is no one pattern he can look at and say, Yes, this is the way it ought to go.

Q: How can banks address the challenge of decommoditzing their products, especially in light of growing Internet use?

A: Bank products really don`t have to be commodities, because many bank services can be personalized to the individual customer through knowledge of what the customer wants. One of the obvious ways is to provide investment services that take into account the age and needs of the customers. One financial institution today that has acquired the highest multiple is American Express. It is trying to personalize and decommoditize all its products. Its loans are made to businesses for which it not only provides the loan, but it provides research information and other kinds of sales help. In other words, it decommoditizes and structures its products accordingly. So in American Express`s case, you can`t just say, I know what the price of that product is, because that product holds a special place in its plan.

Q: What kind of Internet businesses do you think will succeed?

A: The Internet has created two types of institutions. One type is Amazon.com, which, essentially, is selling the same products on the Internet that used to be sold by telephone or catalog. That business is not much different than what we had before, except that you are using a different vehicle to sell it. Also, with this model, you`ve got so many customers that you can advertise to them at the same time. That may not last; customers may decide that they just don`t want to look at all that junk before they buy something. The other kind of Internet business is the creation of something that simply didn`t exist before. eBay is a good example. eBay created an international personalized auction. You couldn`t do that before-there wasn`t anything like it.I think there is considerable evidence that that second kind of business will be the more successful one at Internet operations. So bankers will have to determine whether there`s a new product or service that can be created that the customer couldn`t have gotten before without the Internet. That`s one of the challenges.Overall, though, you can say that anybody who talks about the Internet and really thinks he knows what he is talking about is probably somewhat arrogant. Nobody knows for sure what is going on. These are just observations that may be useful.

Q: Turning the discussion a bit, you recently participated in an industry planning session with the current FDIC management and your fellow former agency chairmen. At the conclusion of that meeting it was reported that the FDIC was worried about community banks, particularly in the area of funding. Can you shed some light on the FDIC`s concerns?

A: It`s very clear that community banks are having difficulty obtaining deposits. In fact, when I ask community bankers what their biggest single problem is right now, nine out of 10 say it is obtaining deposits-at a price they can afford to pay. They can always get deposits, but, obviously, if they pay too much, they will not have any spread.The FDIC released a study that showed a long-term decline in small banks` ability to finance themselves through deposits. It demonstrated how this was squeezing their interest rate margins, in many cases, requiring them to turn away business because they simply couldn`t finance it. That`s a clear trend. The question is, why? One reason is that today, people are putting all their savings in the stock market, whereas they used to put a good portion of it in banks. Second, there are many more ways now for individuals to save with fixed-rate securities. They can buy all kinds of government bonds or mutual fund bonds. In other words, there is great competition for the money that used to go into banks. Part of the reason is that younger generations have not lost huge amounts of money through failed institutions, so the government guarantee of deposits has lost some of its importance to them. The third thing-and this is probably the most distressing-is that most of the deposits that banks really make money on, money that is left there long term, over $100,000, is held by people 65 and older-a group that is not being replaced by younger people behaving in a similar manner. So even the deposits banks have are coming from an eroding base, and yet we all know the standard rule is that 20% of the depositors provide all of the profit of the bank.

Q: What do we do about it?

A: I don`t know anybody that knows the answer to that. Some people have looked at raising money on the Internet from other places in the world. A second solution is that the new bank modernization law allows the Home Loan Bank System to lend under much broader range of security collateral for banks under $500,000. I would guess that for small banks, that`s going to become their major source of funding as time goes on. But that`s only for the smallest banks. Another suggestion is to raise the deposit insurance level from $100,000 to $200,000 per individual, thus giving banks a broader guarantee and broader protection. So far, most free-market economists turn blue when they hear that, but I wouldn`t be surprised if, down the line, that becomes an active subject for discussion. For the banker, the important thing is to be aware that the most valuable asset he has is his deposit customer list. It is eroding, and he needs to spend as much time maintaining that as he does looking for loans.

Q: Did the FDIC conversation focus on anything other than funding?

A: Oh we talk about everything you can think of-from the Internet to real estate risks to the effect of the global economy. The agency has a broad range; they are looking at everything, trying to peer into the future and see what the next real threat will be to the system because, of course, they underwrite it.

Q: Financial modernization finally has been passed. Given that you have been skeptical of the banking industry`s ability to get meaningful legislation through, how do you feel about what has transpired?

A: The most significant thing that the modernization bill did was to allow nonbanks to buy banks. It allowed Schwab to buy U.S. Trust. That`s the biggest change that I see. It does allow banks to buy insurance companies for underwriting purposes; I think that also may be a small benefit. It did, however, complicate the world of banking by creating a whole new series of holding companies over holding companies called financial services holding companies, which has created a huge battleground for contests between regulators. In the end, it may be known not as the modernization act but as the regulators warfare act. It`s difficult to see how it is going to be materially advantageous for the banking industry.

Q: What about the Federal Home Loan Bank funding provision?

A: That little provision, which is marginal, is the only thing in the act that I can find that is useful to community bankers. It does help community bankers sell insurance, because they can now do so without the population of 5,000 restrictions that were required of some banks. But overall, for all the fuss and feathers, it really doesn`t look like it is going to change the banking industry much.

Q: As banks take advantage of the elimination of Glass-Steagall, do you think their stock multiples will finally mirror those of similar industry segments?

A: If banks could take advantage of these new powers to grow the top line, that might be the result. But I don`t see much in the act that is going to allow them to do that in any material way. As we know, because of various exceptions to the law, banks were already into investment banking, selling insurance, selling mutual funds, etc., so I doubt that the elimination of Glass-Steagall is going to change the industry`s multiples. The multiple in banking, which at this particular moment, is at about 50% of the Standard and Poors, will be changed only when banks can prove: 1) theirs is a growth industry, 2) the new productivity of technology is going to improve their profit margins, and 3) they are not going to surprise the market with a whole bunch of bad loans the next time we have an economic downturn.

Q: You co-chair Bank Director`s Acquire or Be Acquired conference each year and have seen the industry consolidating at a rapid rate. What would be your thoughts if you were a director of a community bank seeing this consolidation occurring around you?

A: My first thought would be, How do I take advantage of it to maintain the shareholder value of my bank? There is going to be consolidation, and one has to look at the industry to see why it is taking place and why it is productive. Under the original banking system set up in the United States, banks were restricted to very small geographic areas-not even states, but counties and cities. Therefore, we created thousands of banks, because it was not possible for one bank to operate in various geographic areas. So the system was based not on economic efficiency, but on political bias against big financial institutions. When those kinds of rules were removed, there suddenly was an opportunity to move toward economic efficiency as the way to operate banks instead of just meeting regulatory requirements. That meant that there were huge savings to be made by taking the system and converting it from a politically fractured system into a unified economic system. So, as a director of a bank today, I would want to see where I could improve the performance of my bank by increasing its efficiency.

Q: And if an institution can`t perform?

A: If your institution can`t perform it ought to be sold, and if it can`t perform it is generally because you don`t have good management. But the answer may not be to sell it-the answer may be to get yourself a manager that can perform. The toughest job any director has-and the most important job in my view-is to get sound management. Unfortunately, there is no test of management that you can give to be sure that you are getting the right person. And the toughest job for directors is to realize that they made a mistake: admitting they got the wrong person and getting rid of them and finding somebody who can do the job.

Q: What are some of the creative things you have seen banks do to ensure their ability to compete in the future?

A: There are a number of interesting ideas. One bank, for example, decided that it had to get involved in the Internet but really didn`t have the money to get started. The management knew it had to do it on a profitable basis or not at all. So what did it do? First, it recognized that while nobody was making any money in the Internet because it was all free, the ISPs [Internet service providers]-the access system-the AOLs, for example, were making money. So this bank started its own little access program through its communications department-the opposite of everybody else. It simply provided access. Then it built on that and provided a portal so that now, when you use the access system, the first thing you see is the bank`s Web page, and then you can go anywhere. That bank built the only Internet operation I am aware of that is making money for banks at the moment. It was very ingenious, and created somewhat out of necessity, but it showed that if you`re open-minded, you might come up with some pretty good ideas.One of the other things I`ve seen that banks have just begun to do is either merge with, take over, or somehow combine with estate planning tax services. These banks not only take your deposits, they provide you with estate planning, then they sell you insurance and annuities. In other words, they offer the whole business and they`ve got all the products right there. These banks take themselves out of the position of simply being a provider of a product-they provide you with a service as well. It`s the same thing IBM did to bail itself out of being just a hardware company to become primarily a service company. Unisys did the same thing. Banks can do this kind of thing because they have the customers and they have the customers` confidence.

Q: How important are having a niche and a brand?

A: Well, having a niche and a brand are important if you have something to brand and if you have a niche. If you say, We make loans and that`s our niche, so you should have our Brand X loans, it isn`t really worth much. But if Brand X loans means that your bank acts faster on a loan than anybody else, for example, then that brand is of utmost importance. We live in a branded society, so brand becomes the key to getting business.

Q: What is the best advice you could give a bank director today?

A: For many years, I advised people who were thinking about becoming bank directors not to do so because 1) there is a lot of potential liability and 2) it`s a lot of work. I think most people get by those hurdles because being a bank director is interesting and exciting and offers a chance to make a real contribution. But if you are going to be a bank director, then you`ve got to be up on the issues that are challenging banks today, whether it`s technology, the economy, interest rates; whether it`s the needs of your community or people and recruiting. To be a bank director today, you`ve got to spend a lot of time studying the banking business and trying to determine where, as a director, you can be helpful.

Q: One final question. Is it true that when you were chairman of the FDIC, you turned down a once-in-a-lifetime invitation to play in a foursome with Arnold Palmer, Jack Nicklaus, and President Ford to kickoff the Ryder Cup held at Kiawah Island, South Carolina?

A: It is certainly true that I was invited, and it is true that the invitation was turned down. However, I don`t want to imply it was turned down because I didn`t want to play with these gentlemen, or that it was turned down because I was afraid of the competition. It was turned down after my ethics officer advised me that I should not play in that foursome because we had financed the completion of the Kiawah golf course, and it might look like I had been influenced to spend the FDIC`s money so that I could play with these gentlemen. So the answer is, it broke my heart, but I couldn`t go.|BD|

Join OUr Community

Bank Director’s annual Bank Services Membership Program combines Bank Director’s extensive online library of director training materials, conferences, our quarterly publication, and access to FinXTech Connect.

Become a Member

Our commitment to those leaders who believe a strong board makes a strong bank never wavers.