Prominent GOP regulator from bygone era says nationalize weak banks

Situated between Old Town and the new “railroad” city that spawned our first fortunes, the Albuquerque Country Club is old money. Perhaps because there’s less of it now, club members last week invited one of their own — uniquely qualified in business, finance and government — to explore the financial crisis over lunch.

That’s Bill Seidman, who was all over newspapers and TV in 1989-91 when charged with cleaning up the S&L debacle as chair of the Resolution Trust Corporation.

To that end Seidman built an agency with 8,000 employees to handle some $400 billion dollars in assets in more than 1,000 failing banks. He left to widespread acclaim, the Augean stables spic-and-span.

(Historical note for younger readers — deregulation permitted savings-and-loans to go wild, then go broke. And we commoners paid for it.)

Now Bill Seidman is in the spotlight again. I’ve read and heard his pithy quotes — e.g., “We need competition under rules, not a barroom brawl!” — in the New York Times, on talk radio and CBS Evening News. He’s even doing regular commentary for CNBC Thursdays at 9 a.m.

So when invited by his daughter, an old friend, I seized the chance to hear him at length.

To fully appreciate Seidman’s comments, you should know his story. Early on, he managed the family CPA firm, Seidman & Seidman (1968-74), building it into a national player.

He was in the White House, as President Gerald Ford’s Assistant for Economic Affairs from 1974 to 1977. He served Ronald Reagan, too, twice chairing his White House Conference on Productivity. And he was running the Federal Deposit Insurance Corporation (1985-91) when that S&L challenge arrived.

This New Mexican (he has a ranch in Wagon Mound and a pied a terre in Albuquerque; also homes on Nantucket and in Florida) remains active in the securities business.

And he’s a Republican, of course.

So what did Seidman say? A mouthful; here it is, much abridged and compressed:

Credit (from “credo,” meaning trust) is frozen for lack of trust. Why?

“Ingenious” people created hard-to-value assets. In a “poorly regulated” system, banks joined the subprime game, giving that market “prestige.” Fannie and Freddie Mac diluted their standards. Surprisingly, ratings agencies rated these new, securitized “tranches.” In two years, we had a trillion dollar subprime market.

Credit swaps, newly invented, helped turn the markets into a “pure crap game.”

Chairwoman Brooksley Born of the Commodity Futures Trading Commission urged regulation of these derivate instruments but Alan Greenspan, Robert Rubin and Phil Gramm killed the idea.

Speaking of Greenspan, Seidman twitted him: “The free market will control. Ayn Rand will control.” He suggested, too, the longtime Fed chairman was naïve about business corruption.

The housing boom fed on “relaxed standards” and promotion of universal home ownership. The bust was magnified by leverage — investment banks had persuaded regulators to radically reduce required capital. With “credit swaps in the billions,” AIG, Bear Stearns and others became “too big to fail.”

The administration’s (Keynesian) stimulus program and other federal spending should work. The Fed is spending six to seven trillion dollars to replace private credit with government credit. We’re past “panic” but credit’s still not flowing. And the Japanese lesson is — first cure the banks.

That means ridding the banks of their toxic assets. Geithner’s new plan to auction them may not succeed.

So, I asked him later, you favor nationalization?

“The weak ones, yes.” Seidman said.

“You and Paul Krugman,” I noted. He smiled.

Later, I thought, Seidman — like Obama’s men — is Establishment but he’s experienced and Republican.

To stabilize banking, maybe Seidman belongs in Washington, Geithner at the Country Club.

After that, we should change the system to serve, not exploit us.