Ricki Tigert Helfer
Federal Deposit Insurance Corporation
March 15, 1995
A number of years ago, I came across a copy of a marvelous
letter -- dated April, 1829 -- from Martin Van Buren, then-
Governor of New York, to President Andrew Jackson. It began:
"Dear President Jackson:
"The canal system of this country is being threatened by
the spread of a new form of transportation known as railroads.
The federal government must preserve the canals for the following
"One -- If canal boats are supplanted by railroads, serious
unemployment will result. Captains, cooks, drivers, repairmen
and lock tenders will be left without means of livelihood, not
to mention the numerous farmers now employed in growing hay for
"Two -- Boat builders would suffer and tow-line, whip and
harness makers would be left destitute.
"Three -- Canal boats are absolutely essential to the
defense of the United States. In the event of the expected
trouble with England, the Erie Canal would be the only means by
which we would move the supplies so vital to waging war.
As you may well know, Mr. President, railroad carriages are
pulled at the enormous speed of 15 miles per hour. In addition
to endangering life and limb of passengers, they roar and snort
their way through the countryside, setting fire to crops, scaring
the livestock and frightening children. The Almighty certainly
never intended that people should move at such breakneck speed.
"Sincerely, Martin Van Buren"
What a gem! Over the years, I have heard the letter quoted
to illustrate: one, the attitude of people toward change; two,
the fundamentals of persuasive lobbying; and, three, how
Washington never changes.
There is only one problem with the letter -- no one can
come up with a copy of the original, or a reference to the
original anytime near the time it was supposed to have been
The letter is -- more than likely -- just mythology -- and
as Yogi Berra said: "The problem with mythology is that people
Belief in mythology can be quite a problem -- as the
Federal Deposit Insurance Corporation has found out recently.
As I am sure all of you know, here in 1995 we are still wrestling
with the problem of how to pay for the costs of savings and loan
failures that occurred before the creation of the Resolution
Trust Corporation in 1989. Proceeds from bonds issued by the
Financing Corporation -- so-called FICO bonds -- went to resolve
those failures -- and the savings and loan industry -- through
the Savings Association Insurance Fund -- was required to pay the
interest on the bonds. The S&Ls have done so -- paying $780
million a year since 1989 to meet that obligation. That is now
about forty-five cents out of every dollar that flows into the
fund. Because the $780 million comes out of the SAIF, the growth
of that insurance fund has been stunted, and in fact it contains
only about $2 billion -- far short of the $8.6 billion it needs
to be fully capitalized today. In fact, it is grossly
undercapitalized. The Bank Insurance Fund, however, is not. In
fact, sometime around mid-year it will be fully capitalized at
$1.25 for every $100 in insured deposits -- the target Congress
set for both funds. When that target is reached, BIF-insured
institutions will see their premiums decline significantly.
SAIF-insured institutions, however, cannot see their premiums
decline. Thus, a premium differential will exist between
institutions insured by BIF and institutions insured by SAIF.
So where does the mythology come in?
Some people believe that the FDIC has the means, somehow,
to solve this SAIF/FICO problem effortlessly and painlessly --
all we have to do is wave a magic wand, or clap our hands, and
the problem will go away.
Nothing is further from the truth. The fact is that the
FICO problem arises from assumptions made back in the 1980s about
how much and how quickly the S&L industry would grow. Instead
of growing, it shrank. Further, the problem is exacerbated by
very clear legal constraints that prevent the assessments of some
SAIF members from being used to meet the FICO obligation. There
is nothing that the FDIC can do to change the mistaken
assumptions embedded in the system or the law.
Further, our hands are tied in two of the related matters.
First, Congress set the 1.25 reserve ratio for banks and thrifts.
If we want to raise the ratio above 1.25 for the Bank Insurance
Fund, we have to explicitly state why the conditions in the
industry or at individual banks compel us to do so. Second, we
are required by the law to set premiums for the BIF and the SAIF
independently. Both the law and common sense argue against
requiring BIF-insured institutions to continue to pay current
premium rates -- which add up to about $6 billion a year for the
BIF -- until SAIF is capitalized simply to avoid a differential.
Like the crack in the radiator that triggers the recall of
a make and model of automobile, the FICO problem is a structural
flaw. It is embedded in the SAIF system. It will not go away
by itself -- and the FDIC has no legal authority to fix it.
Most of all, any solution to the FICO problem will require
money -- about $8.4 billion, if we were to pay off the obligation
right now, today. We do not have that kind of money in any
discretionary account nor do we have it hidden away in desk
drawers back at 550 17th Street -- not even close. So I cannot
see how anyone can say that the FDIC has the means to address the
problem, and that we just lack the will. The fact is, we do not
have the means.
Someone is going to have to come up with the money. There
is no way around that central fact, as painful as it may be.
The proposals now circulating on how to address the SAIF/FICO
problem look to three groups to pay for the solution, either
individually or in combination. Those groups are the savings
associations, the commercial banks, and the taxpayers. I have
not met anyone willing to wager that, at the end of the day, the
S&Ls will be on the hook alone.
I do not want you to get the wrong idea, however. The S&Ls
of today are the survivors of the thrift industry melt-down, and
the reason they survived was that they were conservatively
managed. They are no more responsible for the failures of S&Ls
in the 1980s than are the banks or the taxpayers. Still, the
bill must be paid.
Not too long ago, we thought we had plenty of time to deal
with the SAIF/FICO problem -- months to craft a solution, years
until the situation became critical. That is not the case
anymore. We did not factor human creativity into the equation -
- particularly how creative the human mind can be when money is
at stake. A number of savings institutions have recently decided
to take the initiative in determining the deposit insurance
premiums they pay, and in doing so they have injected a certain
urgency into the search for a solution. As we all know, these
SAIF-insured institutions want to create BIF-insured institutions
so that they can shift deposits from the higher-cost fund to what
may well be the lower-cost fund.
Given my Tennessee upbringing -- and meaning no disrespect
to anyone -- I cannot help but call these new BIF-insured
institutions the "born-again": compelled by the promise of
salvation, the old institution goes through a conversion process,
and emerges unstained by the sins of the past, beginning life
Born-again banks -- regardless of whether they hold BIF-
insured savings bank charters or national bank charters -- change
the terms of the debate.
To date, six SAIF-insured financial institutions have
indicated in public their intent to be born again. All together,
they hold approximately $80 billion in SAIF-insured deposits.
If they convert, how big a problem would this be for SAIF? The
SAIF assessment base is approximately $714 billion.
One of the six declared converts is Home Savings of
America. Home alone holds $35.5 billion in SAIF-insured
deposits. Another is Great Western. Great Western alone holds
about $26 billion.
Let us say that all six become born again as BIF-insured
institutions -- what are the implications for other BIF-insured
institutions? If BIF-insured deposits grow by roughly $80
billion, all the BIF-insured members have to come up with an
additional $1 billion in assessments to cover the growth in
insured deposits. That is about 4 basis points added onto the
premium for BIF members for one year -- and many other SAIF
members are considering whether to follow suit and become born
again, as well. If Home alone converts, BIF assessments go up
about $440 million.
If conversion really takes off, what are the implications
for the SAIF-insured institutions that do not convert? The
Government Accounting Office recently noted that the SAIF
assessment base available to pay FICO bond interest is about $500
billion. If the assessment base shrinks to about $325 million,
the FICO obligation becomes a problem. In fact, there is no
question that FICO bonds will run into debt service problems --
even without the born-again banks -- the only question is when.
I agree with Frank Newman, Deputy Secretary of the
Treasury, who on Monday said that Congress should not try to
block SAIF-insured institutions from chartering BIF-insured
institutions. When there is money at stake, the market --
creative people -- will erode or undermine or bypass every
artificial barrier we can construct. Rather than block the
exits, we need to address the underlying problem. There is an
alternative to conversion -- it is called redemption. We have
to find a way to redeem the SAIF so that the members have reason
to stay, not reason to flee.
At the FDIC, we want a SAIF that is just as sound and
strong as the BIF. At the FDIC, we are open to suggestions on
how to fix SAIF. We can fix it now or we can fix it later, but
one way or the other, it will have to be fixed.
As I noted before, a wide range of proposals has been made
to fix the SAIF's problems. All require legislation by Congress;
some require Congressional appropriations. Within these
proposals, there are three broad themes: one, have commercial
banks shoulder some of the burden; two, have the government
shoulder some of the burden; and three, have SAIF members pay a
special assessment. There are many combinations and variations
on these themes. If you are interested in the details and have
not done so already, I suggest you read the GAO's recent report
titled: Deposit Insurance Funds.
In reviewing the options, I remember those times in grammar
school when we would take a multiple choice test and none of the
answers to a problem seemed quite right. If we do not choose the
correct answer, however, the SAIF/FICO problem will just come
back. In fact, it will not even go away, though it may appear
to do so for a while.
I have urged all the parties with an interest in this
matter to be a part of the search for a fair and equitable
solution. If the interested parties do not develop a solution
of their own, they may have one imposed upon them.
As part of the search for a fair and equitable solution,
the FDIC Board of Directors on Friday will hold an unprecedented
public meeting on the issues related to premium proposals for BIF
and SAIF. All I can say at this point is that we are analyzing
the options -- costing them out. We do not have a solution --
we have not made any final decisions -- we are leaving the door
By happy coincidence, Friday is also Saint Patrick's Day.
Numerous legends are told of his miraculous powers. Perhaps the
best known tradition is that he cleared Ireland of its vermin.
A story goes that one old serpent resisted him, so Saint Patrick
made a box and invited the serpent to enter it. The serpent
objected, saying that it was too small; but Saint Patrick
insisted it was large enough to be comfortable. Eventually the
serpent got in to prove it was too small, whereupon Saint Patrick
slammed down the lid and cast the box into the sea. Through
debate and deliberation -- a serious effort to find a solution -
- I am sure that we too can find a means to deal with the serpent
we are wrestling with.