Taxpayers Bailout of Big Banks

The other day I received a letter from Douglas E. Patty, chairman of the Board of the Heritage Bank in Irvine, California, complaining of a double standard in the banking industry.

For the ten largest banks, declares Mr. Patty, such as the Bank of America, Citicorp, Chase Manhattan, Manufacturers Hanover, are allowed to have over $40 billion in risky loans to Mexico, Brazil, Argentina and other third world countries; yet the Federal Deposit Insurance Corporation (FDIC), which insures banks, does not even examine them. The FDIC does examine the small commercial independent banks and has ordered closures of 42 of these banks in 1982 and another 12 by April of this year.

Mr. Patty observes that the Bank of America noted in writing, as of March 10, 1983, it had $3.4 billion in past due and nonperforming loans of all types.

The banker from Irvine is not opposed to closing down poorly performing and mismanaged small banks. Some of these banks were wobbly or worse; while others were managed as if they were situated on the roulette tables at Las Vegas. What nettles him is why the big banks are getting a different kind of treatment from U.S. banking agencies in Washington. This is happening even though the big banks present far more serious risks to the nation’s and world’s =.economy and hold less capital per dollar of deposits and loans than do independent banks.

Mr. Patty predicts that “in the end it will be the American taxpayer, through the International Monetary Fund (IMF), who will bail out these large banks.” Indeed, moving through Congress right now, with little opposition, is an $8 billion bill to beef up the IMF. These will be tax dollars. They will be used to indirectly bail out the overseas, shaky loans of the big banks.

Unlike federal banking agencies which require small banks to have a higher capital requirement than large banks, the IMF has no supervisory powers to follow up its bailout activity. When federal agencies move into save troubled savings banks by merging them with another savings bank, they remove the top executive officer of the failing bank and exercise other supervisory roles. The IMF, of course, has no such powers over the big banks, which is just another reason why the big banks are all over Congress lobbying to get the $8 billion through to enactment.

Reading Mr. Patty’s letter reminded me of a conversation several years ago with an insurance company founder. He related that he once told a Bank of America executive that his bank was too big. When asked why he thought that, the insurance man replied that the Bank of America was too big to be allowed to fail. And that meant, he added, that the federal government was really a guarantor” of the Bank of America. Whereas, he concluded, if the Bank of America was broken up into fifteen smaller banks and one or more of them was failing, the government would not be asking taxpayers to save these. banks from their mismanagement.

Maybe Mr. Ratty should extend his concerns and join with other small business firms, ”ho unlike giant companies have the privilege of going bankrupt, to make the consequences of Bigness in Business a publicly and politically debated matter.

It is small business that has the ability to make big business bailouts less an accepted fait accompli and more a worrisome condition that demands examination. A corporate state of, by and for business Goliaths is dealing more and more unfair competition for smaller businesses that generate most of the innovations and the employment in this country.