Magazine article American Banker

Isaac, in a Shift, Warns Convention on Nationalization: But FDIC Chairman Sees Strength in Fundamental Banking System

Magazine article American Banker

Isaac, in a Shift, Warns Convention on Nationalization: But FDIC Chairman Sees Strength in Fundamental Banking System

Article excerpt

NEW YORK -- In what was probably his last speech to the annual American Bankers Association convention as chairman of the Federal Deposit Insurance Corp., William M. Isaac on Monday issued a warning on the threat of banking nationalization.

The reformist regulator, who is expected to leave office within six to 12 months, told bankers at Radio City Music Hall that banking is fundamentally strong. Despite nearly 800 banks on the problem list, "85% of all banks are in good condition," Mr. Isaac said.

But he also cited the threat of what he called the "nationalization" of banks.

"I joined the FDIC in 1978 and almost immediately began to speak of the dangers [of nationalization]," Mr. Isaac told bankers. "Though I did not use the specific term in public, I cautioned that unless we change course, we might well be headed toward the 'nationalization' of banking.

"After First Pennsylvania and Continental, the warning signs should be unmistakable to even the most casual observer," he said, referring to the government rescues of First Pennsylvania Corp. and Continental Illinois Corp.

Those comments represent a sharp departure by Mr. Isacc from his adamant stand earlier this year that the government rescues of Chicago's Continental Illinois did not represent a federal bailout.

In part, his shift of position Monday and comments on bank nationalization seemed to signal a decision by Mr. Isaac to speak more candidly before stepping down from the FDIC and returning to the private sector.

But it also probably represents his frustration this year with a Congress that has refused to pass what he considers important banking legislation, has all but ignored FDIC efforts to reform the federal deposit insurance system, and has openly challenged the FDIC's basic for seeking control over money brokers who transfer funds between cash-rich and cash-poor institutions.

A key problem for banking, Mr. Isaac said, is the industry's political disorganization. While he praised the ABA's support of many of his agency's efforts, he warned that until banking's divisions are healed, further deregulation or streamlining of the supervisory system will not occur.

The issue of "bank powers," he said, "involves a different kind of power: politicial power."

Specifically, he called for banks to address the problems of the federal deposit insurance system -- an issue particularly close to the FDIC chairman and one whose solution Mr. …

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