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Government Bailouts, Poor Growth Fuel Concerns Over Banking Sector

July 15, 2008 at 6:15 PM EST
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Troubling economic reports and bleak forecasts from the nation's economic policymakers have fueled new concerns over the health of the economy and the stability of the nation's banks. Banking experts offer insight.
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JUDY WOODRUFF: The collapse of California-based IndyMac Bank on Friday was one of the largest bank failures in U.S. history. Now, concerns are growing about the financial stability of other banks.

For some perspective on what’s going on, we are joined by independent banking consultant Bert Ely. And William Isaac, he served as chairman of the Federal Deposit Insurance Corporation, or FDIC, from 1978 until 1985. He’s now chairman of the Secura Group, a financial institutions consulting firm.

William Isaac, to you first. President Bush, we just heard him say that people should just take a deep breath. Just how much anxiety is there right now out there about commercial banks?

WILLIAM ISAAC, Secura Group of LECG: Well, I think there is a fair amount of anxiety out there. People see things like Fannie and Freddie having to be beefed up a little bit by government action, they see the Bear Stearns and the investment banking firms generally coming in to the government for help, and then they see things like IndyMac.

I understand why people are nervous. But I think I would agree with President Bush’s sentiments, that it’s time for us to take a deep breath. We’ve been through worse before. And we’ll get through this just fine.

JUDY WOODRUFF: Bert Ely, how much nervousness do you sense out there?

BERT ELY, Ely & Company, Inc.: Well, I think there is nervousness. The IndyMac failure and the run on IndyMac has certainly fed into that.

But, again, I would agree with Bill Isaac that there is excessive anxiety. The banking industry overall is in very good shape. We’ve had a number of years of very few failures. We will see a pickup in failures over the next couple of years, but that’s to be expected in the type of credit correction we’re going through right now.

But this is not a reason for people to suddenly be very worried about the soundness of the banking industry.

Bank failures still foreseen

Bert Ely
Ely & Company, Inc.
The other thing to keep in mind is the economy is not that weak. We are not in a recession. Unemployment hasn't moved up that much. There are mortgage problems, but I think they're, by and large, manageable by the banking industry.

JUDY WOODRUFF: Why not? Why are you so confident that the industry overall is sound? And you say that there's going to be a pickup in failures. What do you mean?

BERT ELY: Well, there will be an increased number of bank failures over the next couple of years as weak banks that have some serious loan problems will experience losses and fail. But these are going to be, by and large, smaller banks. There are not going to be that many of them.

But over the last 15 years, the banking industry has built its capital position up substantially. Some rules that Congress put in place in the early '90s have helped along to a great extent on that.

The other thing to keep in mind is the economy is not that weak. We are not in a recession. Unemployment hasn't moved up that much. There are mortgage problems, but I think they're, by and large, manageable by the banking industry.

JUDY WOODRUFF: William Isaac, if that's the case, then what happened with IndyMac Bank?

WILLIAM ISAAC: IndyMac was a bank that specialized in making very high-risk mortgage loans. And the mortgage-lending area is where we have most of our problems today, in any event, even when you have good underwriting standards. But IndyMac was making loans without getting financial statements and proof of income from borrowers, so these were high-risk loans.

I would also point out that, while IndyMac is technically the second-largest bank failure ever, second to Continental Illinois, which, as you know, Judy, I had something to do with in 1984, it really isn't comparable, because Continental Illinois was the eighth-largest bank in the country, about a third the size of the largest bank, whereas IndyMac is $32 billion in size compared to our three largest banks, each are around $2 trillion. It's much smaller than the FDIC Insurance Fund, whereas Continental was much larger.

So I don't think IndyMac is -- it's a highly specialized, high-risk institution. And I don't think it's really symptomatic of very much.

Ripples of credit crisis felt

William Isaac
Secura Group of LECG
I think now we're dealing with more of the prime loans, where people have just decided they don't want to keep on paying because their house has lost value. And we'll get through that.

JUDY WOODRUFF: But how much of what the two of you are describing out there, whether on the sound side or the less sound side, is connected to the whole mortgage-lending crisis, difficulty?

WILLIAM ISAAC: Well, I think most of the turmoil we're seeing is related to the mortgage-lending problems. We haven't gotten into a recession yet. If we do, there will be some problems flowing from that. But right now, we're still dealing with the housing issues.

And as far as the subprime housing issues, I think we're mostly through those. I think the banks have taken significant write-offs. They've raised substantial new capital. And I think those problems are pretty much behind us.

I think now we're dealing with more of the prime loans, where people have just decided they don't want to keep on paying because their house has lost value. And we'll get through that.

JUDY WOODRUFF: Bert Ely, remind us what happens when a bank fails. I mean, we've heard a lot about -- and we just heard the Treasury secretary and the Fed chairman talking about what's insured and what isn't. What should people know in this situation?

BERT ELY: Well, I think the most important thing is to have a good understanding of their bank accounts, where they are, what type of accounts they are, and to make sure that, if they are at all uncomfortable, that all of their deposit is insured, keeping in mind that the $100,000 insurance limit is per customer, not per account.

So if someone has two or three accounts in a bank, they ought to add them all up and make sure they're under the $100,000 insurance limit. If they have questions about deposit insurance, they should go to the FDIC Web site, FDIC.gov, or talk to their bank branch manager about their account relationship just to make sure that they're fully protected.

JUDY WOODRUFF: Now, I read in the Wall Street Journal a story yesterday that said 37 percent, or over a third, of the nation's $7 trillion in deposits right now are not insured. Does that sound right to you, number one? And, number two, if that's the case, how does all that money get moved over to insured accounts?

BERT ELY: Well, first of all, that number is correct. A lot of those balances are held by, for instance, large corporations that are way over the insurance limit, a number of individuals who either are comfortable with their bank, and, you know, just are not that worried about it.

That is actually a sign of confidence in the banking industry. And that's why I say to many folks, you know, if you have good reason to believe that your bank is in sound condition, don't worry about it, because we are not going to see that many bank failures.

Banks are sound, must offer credit

JUDY WOODRUFF: William Isaac, we heard Ben Bernanke say at that hearing today, he said, "My concerns have turned less on the solvency of these banks and more on their ability to extend the credit that the economy needs to keep growing." Help us understand the distinction there.

WILLIAM ISAAC: Well, I think he's spot on there. That is my concern, as well.

I believe the banking system is very strong: 99.5 percent of the banks are well-capitalized. They're doing quite well. And the industry as a whole is earning a fair amount of money still.

We've had some substantial losses in some of the largest banks, which brought the overall industry's earnings down, but the largest banks have replaced all that with new capital.

My concern -- and I think Chairman Bernanke's concern is -- that, because of the climate we're in, the nervousness that banks would naturally have, that maybe they're going to tighten up on their credit. Maybe they're going to de-leverage their balance sheet. And then that could lead to a recession. And that, in turn, would lead to more banking problems.

And that's why I think it's very important that we not overreact to where we are today. We're not in a banking crisis today. And I think it's very important that we take a deep breath and stay calm and work our way through this.

This problem we're in today, Judy, is not anywhere near as serious as what we went through successfully in the 1980s, when we had nearly 5,000 banks that had either failed or were in serious danger of failing. That's not going to happen this time.

JUDY WOODRUFF: Last word of assurance, Bert Ely, on this?

BERT ELY: I fully agree with Bill on that. The banking industry is sound overall. There's nothing like the problems of the '80s and early '90s. And, again, I think Chairman Bernanke has focused on the key issue, and that is to keep the banks lending.

There has been an understandable correction and tightening up of lending procedures and credit standards. That's good. Hopefully, there won't be an overreaction and the banking industry will continue to supply credit to those who can handle it.

JUDY WOODRUFF: Bert Ely, William Isaac, we thank you both.