Let's Stop Making the Wrong Mistakes
Wriston, Walter B.
Some of you who have done us the honor of attending many of these forums, may remember that a good many years ago New York had a giant snow storm and we all went upstairs for lunch with little hope of an early departure. One of our colleagues, George Moore, taking advantage of the captive audience, stood up and asked for a show of hands on how many bankers wanted to abolish Regulation Q. If my memory serves, he got one vote, and who knows, that one may have been waving to a waiter.
Here we are, more than 15 years later, and Regulation Q still cannot be kept out of the conversation because Washington is always threatening--or promising, depending on your viewpoint--to do something about it. Over the past 20 years we've had the , , the , and the FINE discussion, among others, all agreeing that something ought to be done. Currently, the Senate wants to eliminate it--by the end of the decade--but the House-Senate conference committee is deadlocked and the House intends to hold hearings.
It would be hard to find a better example of Eric Johnson's observation that "Most government officials are rushing headlong to solve the problems of 50 years ago, with their ears assailed by the sound of snails whizzing by."
Unfortunately, the government officials are not in this alone. The snails are beginning to whiz by our ears, too. There is another famous observation which the Reg Q debate might be used to illustrate, and that is Yogi Berra's explanation for why the New York Yankees lost a World Series. He said, "We made all the wrong mistakes."
The wrong mistakes we have been making in the financial intermediary business consist of fighting the wrong competition. For 50 years we've fought over interest differentials, geographic expansion, NOW accounts, automatic transfer accounts, negotiable CDs, and greeted the technological revolution of the 60's and 70's by asking the courts to tell us whether a computer terminal is or is not a bank. It has become increasingly obvious that, while there may have been some losers in these battles, there have been no winners in the banking business.
Perhaps because of this, over the past several years the perception has grown that it has become more and more important to get our act together as an industry. At the ABA Leadership Conference last summer, important and substantial progress was made. Agreement was reached to support imposition of reserves on transaction accounts for all financial intermediaries and the ABA supported Paul Volcker's plan for stand-by supplementary reserve requirements. The fact that we came together this way is a tribute to John Perkins, Willis Alexander and the members of the Leadership Conference.
While we were forging agreement on these important measures, however, we were still making the wrong mistake in another area. The McFadden Act, like the Maginot Line of World War II, is being outflanked daily by our competition while we bankers are hunkered down manning the turrets against the wrong enemy. While our eyes remain firmly fixed on what our fellow bankers may be doing to invade "our market," our real competition is taking away our business on a daily basis.
Our real competitors have turned out to be, not each other or the thrifts and the S & Ls, but the department stores, the telephone companies, the broadcasting networks, the food chains, and the manufacturers. A dispassionate observer might logically conclude that the first rule for success in the financial intermediary business is never let anybody think you're a bank. If you are a bank, the regulators can turn you down on a minuscule merger; if you are G.E. Credit Corp, you can buy AmFac Financial Corp, which offers commercial and residential real estate loans, equipment leasing, and passbook thrift accounts.
The list of examples is endless. By now almost everyone knows that Sears, Roebuck makes as much from its financial services as it does from selling merchandise, and that J.C. Penney will sell you life and casualty insurance while it issues your Visa card. Not quite as many people know that if you are thinking of buying a vacation home around Colorado Springs, it might be useful to have a friend at the La Choy Chinese Food Company. La Choy and the Security Savings and Loan Association are fellow affiliates of Beatrice Foods--which also makes Samsonite luggage.
Or you might try one of the branches of Central Colorado Bancorp, which is an affiliate of the Baldwin Piano and Organ Company. And if you don't like Chinese food or are not musically inclined, there's still Eva Gabor. Eva Gabor International now belongs to Western Auto Stores, which is a subsidiary of our old friend Beneficial Finance, with its Wilmington bank and trust company, its Texas S & Ls, its credit card, and its Spiegel mail order catalogue.
What do a Chinese food company, a piano manufacturer, and Eva Gabor have to do with Regulation Q? The answer is: nothing. And that is the point of my argument. The real war of financial intermediation is being fought on battlefields where the old rules are irrelevant. Just as the British were proclaiming that they had made Singapore invincible from the sea, the enemy took the island in a few days by attacking down the Malay Peninsula. Herman Wouk, in "War and Remembrance," wrote "Nothing is clearer from Churchill's memoirs than that he himself believed that there was a fortress at Singapore. Of all the people on the spot--army officers, naval officers, colonial administrators, all the way up the grand chain of command--there was not one man to tell the Prime Minister that Fortress Singapore did not exist." It may not be too much to say that many bankers believe in the Fortress McFadden, and that just as the last state legislature blocks the opening of the last office of an out-of-state bank holding company, and our defenses against each other have been made impregnable, all of our business will have moved to our real competition. We can then express dismay that no one ever told us that Fortress Banking was a figment of our collective imagination.
But old habits die hard, and Reg Q is still the outstanding example. The current Senate bill proposes to raise interest ceilings 50 basis points a year for eight years--starting in 1982. Some might say that this is as close to a snail's pace as it is possible to get and still move. Yet a spokesman for the S & Ls is quoted in the press as saying, "I can envision a commercial bank bidding up the price of deposits out of all proportion because it knows that, in the short run, thrifts in the area could not stand the competition." This statement is made at a time when money market funds are paying well over twice the top interest ceiling on savings, and $10,000-minimum certificates tied to the rates on Treasury bills make up probably one-fourth of savings association deposits.
Maybe Gertrude Stein was right. She said that in old age your old enemies mean more to you than your new friends. Perhaps we are suffering from institutional hardening of the arteries and would rather go on sounding the old battle cries until there is no one left to listen because they all will have taken their business somewhere else. And yet, we go on fighting the old ritual battles against the wrong enemy!
We have the spectacle of bankers in one state, in the face of an opinion of a former Solicitor General of the United States, asking their state legislature for a law prohibiting out-of-state bank holding companies from opening any offices in that state. We find bankers in another state standing before the Supreme Court in an attempt to overturn a three-judge District Court ruling that it is unconstitutional for one state to bar trust companies owned out of state from doing business in their area. The Senate of the United States, propelled by 32 state bankers associations, passed the Stewart Amendment to prohibit the Comptroller from permitting limited purpose national banks to do out-of-state trust business. While all this is going on, National Steel Corporation buys a Savings and Loan Association in California, Sears Roebuck makes an agreement with Comsat, American Express buys 50 percent of Warner Communications, and we bankers stay in our bunkers resolutely facing the wrong enemy. We may, in fact, wake up one day and, like Pogo, find out that the enemy is us. And it may be too late.
The impasse on Regulation Q stems, as we all know, from thrift institutions' earnings problems and the insistence of thrifts on retaining their statutory interest rate differential, which is presumable necessary to assure an adequate supply of funds for housing. This is a proposition of increasingly doubtful validity, yet one which has enabled us to live for decades in a regulatory environment that has effectively subsidized borrowers at the expense of savers. But consumer groups and average citizens are finally waking up to the fact that they are also the lenders and that cheap mortgages and usury-ceilings on interest rates are taking money out of their own pockets--because, in the final analysis, those are the only pockets that exist.
People are finding ways to do something about it. While we banks and the thrifts and the S & Ls knock ourselves out over the difference between 5 and 5 1/2 percent, the public is putting its money into money market funds. They grew from $3.9 billion at the end of 1977 to $42 billion at the end of last month. There are those who expect money market funds to reach $100 billion in 1980, and ultimately to capture anywhere from one-fifth to one-third of total consumer savings deposits.
The old system of artificially rigged interest rates is disintegrating. Humpty Dumpty is off the wall and all the king's men will never get him back together again. We now have a pool of about $250 billion in six-month money market certificates at depository institutions. Like the money market funds, they have sensitized savers to money market interest rates and created a brand new situation.
The trend cannot be halted by repressing the money market funds. Even if that were possible, something would spring up to take their place because the public won't accept anything less. The only answer is an unshackling of the traditional depository institutions--that is, all of us--from the government restrictions that prevent us from competing effectively.
The Comptroller of the Currency, John Heimann, has stated the problem succinctly:
Reg Q is not, of course, the only tattered banner on the battlefield of lost causes. The Clan McFadden is also marching to the tune of a rapidly vanishing echo. Perhaps we bankers may succeed forever in keeping out-of-state bankers from soliciting deposits, but what happens to all that money our depositors are withdrawing to buy money market funds? The funds invest not only in Treasury and U.S. government agency securities, but also in large negotiable certificates of deposit, repurchase agreements, bankers acceptances, commercial paper, and Eurodollar certificates of deposit. So a large percentage of what a banker used to think of as "his" deposits is going to end up in somebody else's bank whether McFadden likes it or not.
The money market funds, of course, are not going to have the field to themselves. Sears, Roebuck is gearing up to offer its own commercial paper in thousand dollar denominations to its 26 million credit card holders via the toll-free telephone. And Sears will not be alone, because, in this age of consumerism, the distinction between interest on "big" money and "little" money is politically insupportable.
I am not suggesting that Washington is suddenly going to wake up and give the snails a run for their money. On the contrary, I have no doubt that if we all continue to lobby enthusiastically for our various advantages and privileges, we may persuade our elected representatives to prolong the impasse indefinitely--or at least long enough for us to shrink further our share of the financial business. What I can say with some certainty is that our customers really do not care who wins, because they are in the process of becoming somebody else's customers.
Over the past decade, the business of providing financial services has been changing much faster than the business of banking. The inevitable result is that banks now provide a smaller share of the services. As most of you know, in 1946 we had a 57 percent share of the financial assets of the country; last year it had shrunk to about 38 percent. It is time we started asking ourselves just how small we want to get. Will we settle for 20 percent or 10 percent?
In the real marketplace--as opposed to the political marketplace--new technologies like telecommunications and data processing are providing the means for expanding competition, and inflation is furnishing the incentive. The shape of things to come gets clearer every day. We see it when American Express buys itself a television cable company to add to its bank, its insurance company, and its credit card, or when Sears makes a deal with Comsat to develop home receiving units, or when RCA--which owns Hertz Rent-a-Car--decides to acquire C.I.T.
I mention RCA's connection with Hertz because I was struck by the interesting fact that the RCA-CIT merger happened to coincide almost exactly with the introduction in Congress of an amendment to the Bank Holding Company Act which would ban holding companies and their subsidiaries from engaging in motor vehicle leasing. I do not infer some kind of conspiracy from this event because there is, nothing unusual about it. Unfortunately, it is only part of the trend. Congress, at the urging of bankers, has before it bills to ban bankers from selling credit-related insurance and underwriting most securities including general obligations of the U.S. Government.
But that is only the trend in the political world. In the real world, the currents all run in the opposite direction. And until all of us in the banking community understand and accept this, we will keep on making the wrong mistakes.
Ten years ago when some of us started looking at EFTS as a threat to what we somehow defined as "our" market area, it turned out to be a mistake because it ignored the basic fact of life that whenever a gap exists between what the public needs and what an industry is able or willing to provide, there is another competitive industry--or perhaps several competitive industries--ready, willing, and able to fill the void.
The EFTS debate was also the wrong mistake because, as Yogi Berra might say, we had our eye on the wrong ball. Instead of looking at the cash machines of our competitor down the street, we should have been looking up at those new gadgets called satellites in the sky overhead. What they have done is to weld the world into an integrated economic and financial marketplace where low-cost financial transactions can and do take place instantaneously on a worldwide basis.
The challenge to the banker of the 1980's and beyond is to become a successful part of the global, interconnected financial network and bring his customers into it with him, so that they can share in whatever benefits the world marketplace has to offer. If we stop making the wrong mistakes, then when we are all retired, we may not have to write, as did Churchill about Singapore: "I do not write this in any way to excuse myself. I ought to have known, my advisers ought to have known and I ought to have been told, and I ought to have asked." We should all know, and our advisors and regulators should all know, that we will have to demonstrate to the public that we can do a better job with this money than a chain of department stores or the local TV station. This will not be easy, and there will be plenty of room for mistakes. But at least they'll be the right mistakes because we will finally be making them while fighting the right war, against the right adversary, at the right time.