Seidman vs. Guenther: Two Banking Legends Face Off

A legend might best be described as someone who has made an indelible stamp upon the landscape, leaving a mark so lasting that the people and events that follow are forever shaped by his accomplishments.

At Bank Director‘s recent Acquire or Be Acquired Conference in Phoenix, we were fortunate to bring together not one, but two banking industry legends-former FDIC and RTC Chairman L. William Seidman and former ICBA President Kenneth Guenther-in a face-to-face debate on banking’s past, present, and future and some of today’s most controversial issues. Along the way, both reminisced on their long and storied careers and shared their mutual respect for one another.

Bill Seidman and Ken Guenther are industry icons whose careers have crossed paths numerous times since the early 1970s. Both worked in the White House during the Ford administration-Seidman as assistant to the president for Economic Affairs, and Guenther as senior career policy official in the Office of Trade Relations. A decade later, they led two uniquely influential banking organizations. Seidman was chairman of the FDIC from 1985-1991 and later served as chairman of the Resolution Trust Corp., where he headed up the massive cleanup of the S&L crisis. Guenther, after serving four years as assistant to the Federal Reserve Board, brought his charismatic leadership to the Independent Bankers Association of America (IBAA, now the Independent Community Bankers Association or ICBA) building it into arguably the nation’s most effective grass-roots trade association. In both cases, it was their heartfelt convictions that allowed them to accomplish their goals of improving the nation’s banking system for years to come.

Bank Director reunited Bill Seidman and Ken Guenther to speak to an audience of more than 300 bankers, and the following article is taken from a no-holds-barred question-and-answer session moderated by Bank Director President TK Kerstetter.

When you were in the Ford administration together, did you ever bump heads on issues?

Seidman: I didn’t have problems bumping heads with Ken because he worked for me.

Guenther: Are you kidding? Bump heads with Bill Seidman-assistant to the president of the United States-no way!

There is one story I can share, though. When I was working in the White House trade office, the first time I came in to see Bill, he was in a large office in the Old Executive Office Building. What I noticed was that the walls were covered with fish aquariums. Later, when I got to know him better, I asked him why his office was full of aquariums. He said it reminded him of Washington-when you look at fish in an aquarium, they are usually swimming around very peacefully, but in one quick moment, a cat can devour them.

Seidman: Actually, Ken was one of the youngest guys to head up trade operations when we worked for President Ford. He rose to the top because we fired all the people above him! (laughter) And he wasn’t clearly identified as a Democrat, so he got the job. But seriously, he did a wonderful job. That was my first experience with him.

In early 2004, we’ve seen a flurry of M&A activity, both in large banks and community banks. Everyone talks about the “barbell theory” of consolidation, in which a handful of banks will eventually manage most of the country’s assets. Will this trend continue, and is it good for banking?

Guenther: Yes, I think the industry is still moving toward the barbell. The model gained ground after the Fed’s approval of the Travelers/Citicorp merger during the fall of 1998. However, as banks continue to consolidate and grow bigger, the process creates institutions that are too big to fail-and too big to regulate.

Is this necessarily bad for community banking? No. As these banking elephants form, it creates business at the margins with more disenchanted customers looking for different types of services. So I think it is not a threat for community banking.

Seidman: Rather than a barbell, I’d say the shape is more like one of those dolls that you try to knock over but you can’t because they have so much weight on the bottom. All the assets are going to be with the big banks-a trend that continues every year as we see huge increases in the percentage of banking assets that are held by the big institutions. And while that trend will continue, I think we’ll only see perhaps one more megabank created.

Frankly, from a national perspective, we need some megabanks to compete around the world to finance international business. Business is becoming more and more commoditized, and big banks are a necessary part of the economic battle that we fight around the world.

I agree with Ken that this consolidation trend does not mean community banking is coming to an end. But the future of community banks depends more on Washington than it does on anything else. Unless we are ready to provide small banks with a base on which they can compete with these monsters, then I don’t think their future is particularly bright. There’s a lot to do to create a level playing field-particularly in the reform of deposit insurance. You’ve heard the ridiculous view of many people that deposit insurance interferes with the marketplace and therefore, it shouldn’t be expanded. You’ve also heard that it has cost taxpayers a huge amount of money and therefore, it shouldn’t be expanded. Both of those arguments are not supportable. In the first place, deposit insurance has never cost the taxpayers a penny, yet no matter how much you repeat that, it doesn’t sink in. Second, deposit insurance has made it possible for new banks to start up, and that is key to keeping the small-bank business viable.

As for the argument over the viability of megabanks, yes, they are too big to fail and they are probably too big to regulate if we get into a crisis. But they are part of the direction the world is going. The important thing for the United States is we’re the only major nation that has a large number of small banks, and those small banks-not the megabanks-have been key to the kind of economy that has made us the most productive nation in the world.

Guenther: Bill used the phrase “a level playing field” that is worth exploring a bit. I think that is the last thing you want. On the regulatory front, I bet every community banker feels tremendously overregulated, and I think the reason they are overregulated is-to use a battlefield analogy-the big pigs are the focus of the regulators. This is proper, because they contain the systemic risk, and the bigger they get, the more systemic risk you have. But when the regulators come at them because of their sins and transgressions (think Sarbanes-Oxley), the big banks like to have support troops protecting them: community banks. So, to get at the bigger banks, they first have to kill off the community banks, to get at the pincers, the larger tanks. This contributes in a major way to the enormous regulatory burden we are experiencing. And this regulatory burden is probably one of the reasons for the increase in mergers and acquisitions.

There is progress in Washington toward some relief. What the regulators did in lifting the tiered-CRA schedule was very useful. This is not creating a level playing field-it recognizes that smaller banks should not be under the same regulatory burden as larger banks. Another instance is the FDIC’s creation of a less-complicated exam. These are steps in the right direction-community banks are different animals than the too-big-to-fail banks with their systemic risk. If you put them all under the same regulations, you will kill the small institutions.

Let’s touch on the controversial issue of hybrid banking charters and the expansion of powers for industrial loan companies (ILCs). Bill had referred to ILCs in one of his recent Bank Director commentaries, and Ken wrote to us and took issue with some of your comments-especially with the notion that Wal-Mart does not pose a threat to U.S. banking institutions. Can you both expand on your positions for us?

Guenther: The ILC is a hybrid charter. It’s found in six states, most heavily in Utah. Because it is a hybrid charter, it is not controlled by the Federal Reserve Board under the Bank Holding Company Act. The Wal-Mart threat is not an empty threat. Wal-Mart did try to buy an ILC in California, the application was put in, the superintendent of banks had approved it, and the chairman of the FDIC-perhaps looking for increased regulatory power-indicated that he saw no safety and soundness problems with ILCs. In his recent article in Bank Director, Bill points out that when he was the FDIC chairman, there were no safety and soundness problems with ILCs. Since that time, though, two ILCs have failed in California and have, therefore, put some pressure on the insurance fund.

In essence, there are really two issues. One, Wal-Mart can buy an ILC. Two, it’s a “regulatory-light” structure; those that don’t want to be under Federal Reserve rules and regulations can use the ILC loophole. Fed Chairman Alan Greenspan argues very persuasively that this weakens the regulatory structure. So the bigger players like Merrill Lynch and others that do not want to be under the Federal Reserve System can buy an ILC and get into banking that way. Second, there is the very real issue of allowing Wal-Mart to buy an ILC. Is this all academic? No! In fact, there is going to be a regulatory relief bill up before the House of Representatives in the very near future that proposes to give ILCs and state-chartered banks full national banking and branching powers. [Editor’s note: In late March House members struck a compromise that restricted the growth of new ILCs owned by nonfinancial companies, denying them the broad interstate branching privileges the bill would grant banks and thrifts.] I think there is a safety and soundness problem, I think there are regulatory turf problems, and I think this is a charter that should remain constrained.

Seidman: Let me just say that the only problem I have had with Ken over the years is that he worked for the Fed for a long, long time, and while you can take the boy out of the Fed, you can’t take the Fed out of the boy. During these many years, we have tangled about the fact that although Ken was a great representative for the small banks, he also has an inherent Federal Reserve point of view, which essentially holds that the Fed ought to be the regulator of all banks, that we ought to have a central regulatory system, and that we ought to separate commerce from banking. I used to think the separation of commerce and banking was simply a Federal Reserve argument for broadening its power and allowing it to be a superregulator. However, I have spent a lot of time in the last 10 years in the Far East, and when banking and commerce get together in the wrong way, huge problems can emerge. Therefore, I have a much greater respect for that argument now than I had when I was head of the FDIC, because I’ve seen the abuse that can happen.

To get back to the ILCs, in the first place, they are not full-service banks. They don’t take deposits and you can’t write checks. They are not consumer banks. They do have other banking powers, though, and it can be argued that a lot of consumers would probably like to have a bank in Wal-Mart or other similar places. These exist now; they are simply not run by Wal-Mart. In this day and age, it seems pretty hard to argue that you have to prevent Wal-Mart from owning a bank because you are afraid it will serve the consumer better and run traditional banks out of business. First, I don’t think that will happen; second, they are not the same kind of banks. In the end, I think the argument that it is better to protect business rather than allowing it to compete freely is likely to lose, politically. So the issue to me becomes how will ILCs create an unfair advantage in banking?

Guenther: Let’s drill down a little bit. Take an ILC bank chartered in Utah. Is an ILC bank in Utah adequately supervised? FDIC Chairman Don Powell would say, “Yes.” The superintendent of banks in the state of Utah would say, “Yes.” I accept that, but then take an ILC bank owned by Merrill Lynch. What happens to the regulation at the holding company level? Now pit this against New York State Attorney General Eliot Spitzer’s near-criminal indictment of Merrill Lynch, and it raises the specter of failure, just as it did with Arthur Andersen. So you have the superintendent of banks of Utah saying there’s no safety and solvency problem at the bank level, Don Powell saying there’s no safety and solvency problem at the bank level, but then when you have a bank owned by Merrill Lynch, you potentially have a major safety and solvency problem at the holding company level.

Yes, I do come out of the Federal Reserve System and I do think umbrella supervision and regulation are necessary. I think if you took that away, it would increase systemic risk. In the case of ILCs right now, if they gain approval we will be allowing the rise of a parallel, less-regulated system. If we go back-way beyond Bill’s and my time, back to Gresham’s Law, 1558-bad money drives out the good. Likewise, bad regulation drives out the good, and I don’t think that is where we want to go in this country.

Seidman: Ken’s essential argument is that you have to regulate anybody that owns a bank. I know of many more banks that have been wrecked by doctors than by corporations! So it is hard to say that Wal-Mart has an increased potential of going bust, which would in turn hurt the banking system. In the first place, the FDIC regulates ILCs the same way it regulates community banks-with respect to owners and what they can do. So there is really nothing new about the idea of regulating the owners of banks.

This is not a black-and-white issue, and, if I were a community banker, I’d be determinedly on your side. Also, in the context of this discussion, I have to reveal to you that I am a director of an ILC.

Guenther: Bill is seen as one of the few living national treasures in this country with regard to financial issues. If he were in Japan, he would have medals hanging all over him! But I don’t agree with him on this subject. How big is big? How big do you want these firms to get? Why, Wal-Mart has been characterized in the Wall Street Journal as the Black Death! Why extend the Black Death to the banking sector? How big do you want to get-combining the largest retailers with the largest banks? What do you get out of it in the final analysis? Is it really pro-consumer? I rest my case.

Obviously this is a debatable topic, and an issue we’ll be watching in the months to come. Regarding another current topic of debate, could you comment on the regulation of Fannie Mae and Freddie Mac?

Guenther: I believe there is the potential for a real conflict of interest here. I am the chairman of the Homeownership Alliance, whose foundation members include the home builders association, the Realtors, Fannie Mae, Freddie Mac, and the Independent Community Bankers Association. The Homeownership Alliance tries to create a positive image about what is happening with home ownership, and I think there’s a very positive story to be told. I also think there is a meaningful role for the housing GSEs to play, though they have gotten very big. I am concerned, from the community banking point of view, that if there is a new regulator over Fannie and Freddie, there is probably going to be the same regulator over the Federal Home Loan banks. Community banks are increasingly dependent on Federal Home Loan Bank advances for flexible, competitive funding. I’d hate to see the Federal Home Loan banks fall under the regulation of the Treasury Department. I think the Treasury Department honestly has little use for the housing GSEs and has little use for the Federal Home Loan Bank System. This [Treasury] is a very, very strong, powerful group in Washington tied into the free-market think tanks-the Heritage Foundation, the American Enterprise Institute-who have no use for the housing GSEs and are supported by very powerful lobbying groups that want the housing GSE business for their own. So I think you’ve got to look at this very carefully. Community banks have a major dog in this fight in terms of who will become the new regulator of the Federal Home Loan banks and what powers that new regulator will have.

Seidman: I agree. In the first place, once again, I must disclose that I worked for Freddie Mac, but Freddie Mac is somewhat of an anomaly in this whole era of fraud and bad ethics, because its problem was that it had $5 billion of profits that suddenly were thrust upon it when the accountants changed the rules on reporting hedges. No one stole anything, no one did anything but try to find a way to get around an accounting rule that dealt with reporting profits by marking to market, which meant estimating future profits.

Even so, given what is going on, I agree with Ken’s view that the Federal Home Loan Bank System is an essential part of small-bank existence. If you get it too mixed in with the big GSEs it’s going to make it tougher for it to do its job. Right now, Senate Banking Chairman Richard Shelby says that he supports an independent regulatory agency. I think that is the best answer, but it would be even better-though it’s a long shot-if Congress would leave the Federal Home Loan Bank System out of it and just regulate the GSEs.

How about the issue of taxation of credit unions?

Guenther: Here is my very honest political prognostication: This is a Republican administration that has been cutting taxes across the board. It is not going to support taxing credit unions. Likewise, progress has been made in terms of the tiered-CRA system. Again, this is a relatively free-market Republican administration and Congress, whose members are not going to impose CRA on anyone, so I think the most practical path is to continue to expand and liberalize Subchapter-S. Let’s try to get banks on a more level playing field by cutting taxes for more and more banks. Subchapter-S has been an enormous success story for community banks. So I don’t think the government is going to increase taxes on credit unions and

I don’t think it is going to impose CRA on credit unions, even though there are people who throw this raw meat to community banks so they get all excited about credit unions and forget about what the big boys are doing.

Seidman: I’ve always said from way back that if you tax credit unions, they will simply cut their rates and pay bigger dividends. And in the end, it will make them tougher competitors because they don’t have to make money.

What other major issue do you believe will significantly affect the banking industry in the future?

Seidman: As I have said many times before, “He who lives by the crystal ball will eat ground glass.” I’m much better at predicting the past. However, I think the biggest potential problem out there would be a sharp increase in interest rates. This could come about if the rest of the world decides that investments in U.S. government bonds and U.S. securities are not as attractive as they once were, and they start to dump them. The central banks of several major countries that have trade surpluses with us are already talking about it. Because of the level of debt we have in this country, the potential for a sharp increase in interest rates is clearly one thing we have to be wary of. It’s something the Federal Reserve cannot control. It will be like the kid trying to hold back the tide if the world’s markets move against us.

Guenther: I agree. We are, as you know, at a 45-year low in the federal funds rate, so the next move is going to be up-the only question is when. And it will take place during a bitterly fought election year and at reappointment time for the Fed chairman. After the election in 2004, the economy should be coming along very nicely. Will the Fed increase the federal funds rate before the election? There’s raging debate on that, but I think there’s maybe one given, and that is, if Bill is right in terms of the macroeconomic factors that are working their way through the system, Chairman Greenspan is not going to leave office with the legacy of having reignited the forces of inflation. So what are we all going to see in 2005? How far will the rates go up? And again, how have you prepared for that? And there’s another view that says the economy is enormously under capacity and there are no inflationary pressures. So indeed, we’ll just have to wait and see.

Let’s move back to a more personal note. Looking back on your careers and the influence you both had on the banking industry, is there a decision or event you would change if you had the ability to do so? And conversely, of which accomplishment are you most proud?

Seidman: Well, I’ve made so many mistakes that it’s hard to pick out the one I would regret the most! Probably one of them was when I was in the Ford administration, and I was called by a reporter from the Washington Post who was working on a story that said John Sununu, the White House chief of staff, suggested that the way to handle the S&L crisis was to have a tax on depositors so they could help pay for the mess that had been created. Without thinking, I said, “That’s wonderful. They used to give away toasters, and now they are going to have a tax-We’ll call it the toaster tax.” Well, it was not a good thing to be funny about the chief of staff to the president. That caused me innumerable problems over my entire stay in Washington. Basically, you can do anything to folks in Washington except get people laughing at them-then they get mad.

How about the defining moment, Bill?

Seidman: I believe the most important thing I did was to help set up the strong banking system we have now. It’s amazing-if you look at this last recession and the huge corporate governance problems we’ve had, 99% of the banks have been OK on both issues, much better than in many other industries. Most of that is a result of the cleanup that took place in the late ’80s when the RTC was handling the problems and nonperforming loans. The fact that I could lead the government’s charge to clean up the banks-to get rid of the bankers who were either incompetent or dishonest-is a major accomplishment to me. It turned out to be very beneficial-even though I used to say that the trouble with the job was that it was a combination of garbage man, IRS agent, and floor sweeper-there was nothing good about it! Yet, since that time, I have been all over the world working with countries that need help because they have these kinds of problems, and many times nothing gets done because the tough thing is to have both a government that supports the cleanup and people who will go in and do what we did then: close bankrupt institutions and sell property at outrageous prices. Japan has been trying to do it for 12 years, and it is finally getting there. The problem for the Thais, the Koreans, and the Europeans is not that they don’t know what to do-the problem is that they don’t want to do it.

Ken, looking at your own career, what might you change and what was your defining moment?

Guenther: Bill Seidman commented about my time with the Fed-I remember when I was hired by Chairman Arthur Burns, his last words in the interview were, “Do you realize that when you join the Fed, you take the veil?” I didn’t quite realize what that meant, not being a Catholic, but Bill is right, I do consider the Fed to be a pretty good church to be a member of-a strong, independent central bank. So my two stories are going to tie into the central bank. Story number one involves something I am proud of. After Chairman Greenspan rescued Long-Term Capital Management in the morning, in the afternoon while the Glass-Steagall bill was still pending before Congress, he approved the merger of Citicorp and Travelers. We [the Independent Bankers Association of America] sued. Subsequently, our suit was thrown out of court as being premature; by the time it would have been mature, Glass-Steagall had passed Congress. No matter what, I feel very, very good about bringing that suit, even though I was very nervous about suing the beloved Fed.

Another defining moment for me harkens back to October 6, 1979 when Fed Chairman Paul Volcker came back from a meeting in Brussels and changed the monetary policy of the United States. The federal funds rate moved just short of 15% and the prime rate went over 22%. In today’s climate, when the Fed fiddles with one word, the markets go absolutely crazy! I think we overlooked the impact of moving the federal funds rate up 7% or 8% and moving the prime rate up 10%-it broke the back of the savings and loan industry. I really wonder, looking back on it, whether it was necessary to go that high with interest rates. It had the desired effect, in terms of breaking the back of inflation, and it was a very heroic act for that reason, but there was blood all over the floor. Anybody with a little bit of gray hair can remember that very traumatic period. It was the worst debacle in our working lifetime, and one for which Bill Seidman was called upon to come in and clean up-and he did a superb job.

Seidman: I can remember very well when Paul Volcker used to introduce me, one of the lines in his introduction was that I handled 1,000 failed banks and 700 S&Ls during his term. Volcker would then jokingly imply that I must be a failure because of all those failed institutions. I always retorted that I had all that practice thanks to his 21% interest rates! I thought at the time, and I still believe today, that raising interest rates by that much was very ill advised. Why today, if the Fed saw inflation out there and raised interest rates by 5% or 6%, we’d have such bankruptcies that you would hardly believe the country could survive it! I think Volcker is a brilliant guy, but he got out of control at that point. There were other means that could have been employed. And don’t forget, most of the S&Ls were good citizens doing what they were supposed to be doing-borrowing short and lending long-and as long as inflation was under control, they were OK. It was the government’s fault that we had inflation, not theirs. One thing you can count on: There is no justice in what happens in the economic system and the government’s reaction to it.

As you have observed each others’ careers, what single event did you note that made you sit back and say, “Wow, that took guts?”

Guenther: Bill basically has answered that question himself. It’s his forthrightness, his knowledge of the way power works-his Sununu story, for example. I look at Bill Seidman with amazement and wonder. At age 80, he is still a commentator for CNBC. I remember back when he was the FDIC chairman, he fell off a horse at his ranch in New Mexico and was dragged through the desert and almost ripped in half. We were sitting there saying, “Rest in peace, Bill Seidman, you have had a marvelous and wonderful life.” But nothing stops him. He is a national treasure, a man of indomitable courage and indomitable spirit, who has had a magnificent life that we can all look at with wonder and aspire to.

Seidman: Thank you. Well, that sort of leaves me speechless, to tell you the truth. I will say, in watching Ken’s career, he has taken a relatively small group in the scheme of things in Washington, D.C. and made it one of the most powerful organizations in that city. He’s done that because he understands the system, and he understands the needs of his group. In doing so, he has really constructed a new kind of Washington movement in which he gets not only his own people but all those who have a common interest to work together. He more or less invented that and has become known as the most effective association leader in Washington. So as he retires, it’s going to be a great loss for the industry not to have him there, though I know he’ll be around.