What do a $10 million Massachusetts bank, a $1 billion Michigan bank, a $10 billion Pennsylvania bank, and a $40 billion Illinois bank all have in common?
These are the "magic four" of modern banking history that could not be allowed to fail. Boston's Unity Bank, Detroit's Bank of the Commonwealth, Philadelphia's First Pennsylvania Bank, and Chicago's Continental Illinois National Bank and Trust Co. were all "failed" banks that never closed because they were allowed to survive with federal aid.
Why these? Irvine H. Sprague knows. As a director of the Federal Deposit Insurance Corp., he was involved intimately with all four. These banks were considered "essential," and Mr. Sprague says there will be other banks that will qualify as too important to the national interest to close.
"The institutions that have been kept alive through government intervention for extenuating circumstances -- they have relevance now," he says.
Appointed by President Lyndon Johnson, Mr. Sprague served as an FDIC director from 1969 to 1972 and as chairman from 1979 to 1981. He has worked through nine Treasury secretaries and has helped handle more than 300 failed or failing banks requiring FDIC outlays -- more than any FDIC chairman or director since Leo Crowley, FDIC chairman in the 1930s, when literally thousands of banks collapsed.
Modified Payoffs Studied
More than 50 years later, the nation struggles under a modern record pace of bank failures. With 100-plus annual failures forecast for the next few years, the banking system still ponders a fair method to allow any bank, small or big, to fail. So far, one controversial concept considered is the use of modified payoffs -- paying off insured depositors and sharing the proceeds of the liquidated bank with remaining depositors and creditors.
But a firm solution still is being sought. This summer, even Mr. Sprague candidly noted regarding modified payoffs: "The problem with this approach is we know in our hearts that it would not be used for a Citibank or a Bank of America. Should we use it for others?"
Mr. sprague -- hidden and silent during the reign of FDIC Chariman William Isaac, which began in 1981 -- has brightened up considerably with the arrival this fall of the agency's new chairman, L. William Seidman. Nearly as one brother to another, Mr. Seidman has called upon Mr. Sprague for guidance after years in which the latter felt neglected under Mr. Isaac.
"Seidman and I get along very well. We are both the same age. We both lived through the 1930s. We both served in the White House. We both have had a wide background in government. We both believe in solving things by comprise rather than confrontation. Aside from that, we like each other." He chuckles.
Check for $325 Million
That attention from the top has made Mr. Sprague's planned departure from the agency a lot easier. In a recent interview in his private dining room, Mr. Sprague appeared relaxed, and he was wearing the comfortable plaid shirt and cardigan that have characterized his recent tenure at the FDIC. Adorning the walls are photographs, including one from many years ago of Mr. Sprague and Mr. Seidman together. A canceled check for $325 million is framed nearby, a souvenir of Mr. Sprague's …