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Remarks by

L. William Seidman
Federal Deposit Insurance Corporation

Before

Credit Union National Association, Inc
Governmental Affairs Conference^
Washington, D.C.^
February 6

1990 v

Comments on the Current Financial Scene
Good morning ladies and gentlemen. I am pleased to have this
opportunity to address CUNA's Governmental Affairs Conference and
I promise to keep my remarks brief this morning.
Just a few minutes ago before I came out, I had the great
pleasure to meet your guest from the Solidarity Party in Poland,
Mr. Adam Jedlinski.
I'm sorry Mr. Lech Kaczynski was unable to be here today.

I

hope after a speedy recovery, he will be joining us in
Washington.
As I understand it, these gentlemen have asked the Credit
Union National Association for advice on how to restructure the
Polish financial system.

The fact that they have asked you for

advice increases my optimism for their future success
immeasurably.

The fact that they did not ask me for advice

increases it even more.
But, you know, I can't help thinking what I might tell them
if they had come to me for advice.
them what to do—

I'm not sure I could tell

but, given my experience with the U.S.

financial industry over the last couple of years, I think maybe I
could tell them what not to do.




2

First off, I think I would tell them that as they explore
the advantages of a free market, not to abandon all governmental
control of their financial system. The truth is— no free market
ever worked without government regulation.
Our current problems with the savings and loan industry are
in large measure a result of too little supervision.
For all the right reasons, but with too little fore-thought,
we deregulated the savings and loan industry.

We allowed the

thrifts to act like they were using their own money.
Unfortunately, we neglected to provide for the supervision
of thrifts that reflected the fact that 97% of the money was
government insured deposits.
Conseguently, some inexperienced people made a lot of bad
decisions and some fraudulent operations seized the chance to
steal us blind.
I hope that we have learned a lesson from this costly
mistake that we will not forget, and our friends will find
instructive.
Next, I think I would tell our friends not to set up a
system that favors debt financing over capital formation.
One of the most disturbing developments in the U.S. economy
is the high level of debt held by individuals, corporations, and
governmental entities.

Since 1965, the total debt of the

domestic, non-financial sector has increased almost tenfold.




3
This tremendous amount of debt is a danger to our financial
system.
There is probably no private sector area where this debt
phenomenon has raised more concerns than in the use of highly
leveraged transactions or Leveraged Buy Outs.
Did you know that the total value of the LBO's completed in
1988 alone accounted for $77 billion.

Regulators, Congress, and

the media have all highlighted this problem and searched for
solutions.
I would tell Mr. Kaczynski and Mr. Jedlinski to adopt a
system that discourages this kind of favoritism for debt.

One

way they might do this is to set up their tax system so that it
gives equity financing the same priority as debt financing.
In our system, interest on debt paid by corporations is tax
deductible, dividends paid to shareholders are not.

In effect,

our system rewards corporate debtors by making it cheaper, "taxwise," to raise money by borrowing rather than by selling stock.
Don't do it this way!

I would tell our foreign friends.

I have some ideas on how we could change our own tax system
so that it wouldn't favor the debtor.
treat dividends and interest alike —
treat salaries.

My view is we ought to
and in the same way we

We all know how salaries are treated.

employer withholds the tax from us wage-earners.

We then use

that with-held tax (as shown on our W-2 form) to pay our
obligations April 15.




The

4

I think we could treat dividends and interest payments the
same way. That is to say, make them both tax deductible to the
corporation and subject to with-holding for the benefit of the
investor.

But, I'll have more to say about this idea one of

these days soon.
There is another thing I would tell your friends—

I would

tell them to treat government guarantees like poison.
Now, they might think this was pretty strange, advice coming
from the Chairman of the Federal Deposit Insurance Corporation.
But then remember, we (as the Resolution Trust Corporation) have
been assigned the task of cleaning up the S&L mess.

A mess

caused by government guarantees out of control.
In fact, let me tell you what that situation looks like
today.
As of January 16, 1990, the RTC had resolved 40
institutions.

It had 293 institutions under conservatorship.-

These 333 institutions held $136 billion in gross assets and $148
billion in liabilities

as of September 30 of last year.

Our

estimate of the cost of resolving these institutions is
approximately $42 billion.
about tomorrow?




Now that's just today's menu— what

5

A preliminary estimate given to the RTC by the Office of
Thrift Supervision on January 18, indicates

there are 225 to 295

institutions with $160 billion to $200 billion in assets, above
those already under RTC conservatorship, that can be considered
"likely to fail.”
That preliminary estimate also identifies an additional 295
to 325 undercapitalized institutions with $185 billion to $205
billion in assets categorized as "distressed"

maybe they will

fail, maybe they won't.
The estimated loss today might be about 20 percent of the
gross assets of the institutions that do actually fail.

However

changed conditions can change that estimate either way.
As a further result of the S&L mess, the RTC has assumed the
litigation responsibility for over 40,000 lawsuits.
expect to end the year with double that amount.

In fact, we

We may even

create a shortage of lawyers.
However, if our friends from Solidarity chose to ignore my
advice and insist on setting up a deposit insurance system

then

I hope they wont allow the participating institutions to treat
premium payments as assets on the books.

But, perhaps I should

save that issue for another group.
I would also tell our friends not to panic at the first hint
of a recession.
economic life.




Free markets have recessions— it's a fact of

6

As a matter of fact, I have been getting a lot of questions
about our own economic health in light of our recent experience
with the real estate markets and the Resolution Trust Corporation
(which incidently, along with the FDIC has over $30 billion worth
of real estate to sell.)
Contrary to some opinions, I am not the Cassandra of real
estate forecasting.

It is true, the real estate market is soft

in some areas of the country, particularly in the southwest and
the northeast.

But, it's an ill wind that blows no good.

Frankly, I would view the situation as an investment
opportunity.

It's a time for savvy investors to pick up some

very good deals.
Perhaps your friends from Poland might like to buy an office
building in Dallas?
I would also remind our friends to cherish their middle
class and never to let the disparity between rich and poor become
too great.

One of the great strengths of America is that the

majority of its citizens see themselves as members of the middle
class.
Credit unions have ,long known this fact and through their
service to their communities they have inspired and strengthened
working Americans everywhere.




7

Let me just add that credit unions are doing well as a
result of their fine service to the community.

I hope you will

not forget that fast growth, new and unfamiliar business as well
as poor supervision at the S&L's was the cause of their demise.
I hope you will have the wisdom to avoid their temptations
and to stay with your traditional lending strengths.
There is one last thing I would tell your friends.

It's the

same thing I regularly tell myself— and that is to guard your
political freedom as if it were your life savings.

In reality,

that's exactly what it is. Economic freedom depends on political
freedom and vice versa.

No one has ever found a way to have one

without the other.
That's about all the advice I have to give. I'm sure I've
left out a lot of important things.

But, as I often tell my

children— I'm not young enough to know everything.
It's been a great pleasure being with you today.

There is

one thing I can guarantee your friends from Poland — by coming to
the Credit Union National Association, they are certain to find
good friends and good advice.
Thank you.