When President Carter appointed me to the three-member board of the FDIC in 1978, the FDIC was about to be truly tested for the first time since the Depression. Beginning in the 1960s, Federal budget deficits and monetary policy were out of control, causing severe inflation, particularly harmful to lower income and fixed income Americans. As Yogi Berra would say, today it’s “déjà vu all over again.”
To his eternal credit, President Carter appointed the great Paul Volcker as Chairman of the Federal Reserve in 1979 and charged him with eradicating inflation. Volcker knew this would require restricting the growth in the supply of money, which would result in much higher interest rates, recession, and, potentially, massive failures of banks and S&Ls, likely accompanied by failures of businesses, farms, and real estate ventures. Altogether, the country endured two serious recessions in the 1980s and experienced the failures of some 3,000 banks and S&Ls, including many of the largest across the U.S.
Much like today, when I joined the FDIC, the organization faced enormous problems. I had an omen of what was to come on my first day in office. I met the FDIC’s Executive Secretary at downtown hotel in Louisville where I lived at the time. He swore me into the FDIC in the lobby, and we flew to San Juan to oversee the failure of Puerto Rico’s second largest bank. Though I was only 34 years old, I was the only one of the FDIC’s three-member board able to be in Puerto Rico, so I was in charge at the scene of the failure.
With interest rates about to climb sharply to combat the scourge of inflation (sound familiar?), the S&Ls insured by the FSLIC and the savings banks insured by the FDIC were going to get hit very hard. So, the FDIC had to grow and better train its staff quickly – we went from 3,000 people in 1978 to around 20,000, and we built a state-of-the-art training center to prepare our burgeoning staff. We also significantly enhanced compensation and benefit programs to attract and retain the best staff possible.
We formed two task groups of FDIC examiners, economists, lawyers, and bank liquidators to scope the dimensions of the problems, estimate how many savings banks would fail and when, determine how we would handle the failures and at what cost using three different interest rate scenarios. Each team was assigned savings banks to monitor and handle their failures.
We were extremely nervous about the possibility massive bank runs, as the Great Depression remained a vivid memory. Depending on how high and how fast the Fed pushed up interest rates, nearly every savings bank in the nation was vulnerable, not to mention the much larger and numerous commercial banks. If we were not extremely careful and good at how we handled this situation, we might trigger a 1930s-style bank run. Today, faced with another similar crisis, we need to absorb the lessons of history.
We decided to handle the failures, to the maximum extent possible, by merging the failed banks into relatively healthy banks through a secret competitive bidding process through which the FDIC would provide financial assistance to ensure the resulting bank would not fail.
Prior to my becoming Chairman, the FDIC almost never talked publicly about problem banks and bank failures. But I believed we needed to be more open about the problems we were facing and how we would handle them. My view was that since we believed many banks were going to fail (some 3,000 did, including many of the largest in the nation), we should let the public know what we were expecting so they would not be surprised and panic when the failures began in earnest. So, at the beginning of each year, I publicly disclosed the FDIC’s estimate of how many banks were likely to fail during the year ahead. Honest, clear and timely disclosure is more important now than ever before, because misinformation spreads so catastrophically quickly through social media.
In 1980, the largest bank in the US has $100 billion in assets. The FDIC fund stood at just $11 billion. Today those numbers are $3.5 trillion and $130 billion, respectively. The public panic after the meltdowns of SVB and Signature Bank was probably due in part to people reading the huge numbers associated with these failures on Twitter and failing to understand the inflated numbers.
The key lesson to learn from my experience, made more urgent by the rise of social media, is this: If the public is not given timely information they can trust, they will come to their decisions based on whatever speculation catches their attention. Regulators and bankers must act quickly, openly, and decisively.