`December Surprise' Not a Real Surprise

FOR the publicists of a Washington Post book, "Banking on the Brink," it must have been a dream come true. Ross Perot cited the study in the last presidential debate. "If you believe ... this extensive study that's been done, right after election day this year they're going to hit us with 100 [failed] banks. It'll be a $100 billion problem."

Then a week ago at a Washington press conference, the acting chairman of the Federal Deposit Insurance Corporation, Andrew Hove, dismissed the study as "inaccurate."

To a publicist, such attacks are marvelous - they keep the book in the public eye. They enabled the Washington Post to give the two authors a half-page in last Sunday's newspaper to outline their thesis of a "December surprise." They gave the publicists an excuse to fax more than a dozen pages of response to the criticisms to this newspaper and probably others.

Regarding the FDIC countercharges, Edward Hill, an economist at Cleveland State University and one of the co-authors, stated: "This is a simple but sloppy hatchet job that tries to deflect attention from the real story: the FDIC's unwillingness to be straight with the American people about the true conditions of the American banking industry. As a critique of our book, it is sophomoric and riddled with embarrassing errors. If the FDIC is no better at reading bank books than it is at reading ours, the tax payers are going to be in for a nasty surprise."

Mr. Hill was concerned about his professional reputation. He doesn't get royalties on extra book sales.

Will bank failures match the savings and loan crisis after the election?

No, says Paul Nadler, a professor of finance at Rutgers Graduate School of Management in New Jersey. "Sure there are some problems, but nothing of that nature." He had a copy of the $220 book on his desk. "Nice paperweight," he says. "It is so easy to write a book that scares people. Who's going to buy a book which says everything is going to be fine in 1999?"

Professor Nadler adds: "Banks are not savings and loans." Banks haven't been taken over by crooks and incompetents, as were so many S&Ls in the 1980s. They have been better regulated. They have not been allowed to make "phony capital out of thin air." Moreover, banks have been benefiting from the current wide spread between the interest they pay on deposits and the interest they get on loans or other investments.

Certainly United States banks have been making money. They posted a near-record profit of $7.96 billion before extraordinary items during the second quarter of this year, according to Sheshunoff Information Services Inc. Earnings for the first half of 1992 are up 57 percent from the first half of 1991.

"Thanks in large part to continued declines in interest rates, we have seen a number of marginal institutions make their way back to profitability and improve their capital positions," states Con Rusling, president of Sheshunoff in Austin, Texas.

Oddly enough, despite the flap over the book, the authors - Hill and Roger Vaughan, an economic consultant - are not far apart from the FDIC in their estimates of the cost of bank failures to the federal Bank Insurance Fund. Hill and Vaughan's most likely scenario puts that cost at $53 billion between 1992 and 1996. The FDIC's latest estimate is $46 billion.

What probably got the FDIC and other bank regulators upset was the authors' charges that the officials were holding back in acting on troubled banks until after the election. Mr. Hove denied that in testimony to Congress Monday. He said the FDIC had "resolved" institutions with $5 billion in assets in October alone. The fewer than expected closures this year were due to low interest rates and the ability of some troubled banks to improve their financial condition, he explained.

Under a new law, "critically undercapitalized banks" will be subject to quick closure after Dec. 19. There were 60 of these banks with $25 billion in assets as of June 30, Hove testified. Fourteen of these have since been closed. Others will fix themselves up financially before the deadline. He expects failures to cost the insurance fund $5 billion altogether this year, and $13 billion next year. Much will depend on interest rates and the general health of the economy. But those sums are much smaller tha n the taxpayers' $150-billion cost for the thrift-industry collapse.

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