Lessons [not] Learned from the Eighties

At some points in history I believe it is easier just to let those that have been here before show us the way. I believe today to be one of those times.

With that introduction, here are a few quotes from L William Seidman, the chairperson of the FDIC from 1985 to 1991. Needless to say, he knows a few things about banking crises.

From a paper entitled The World Financial System: Lessons Learned and Challenges Ahead presented at an International symposium entitled “Lessons from the Eighties: What Does the Evidence Show?”

He discusses his 5 Lessons learned from the Banking crisis of the 1980′s in the United States (all emphasis is mine):

• Lesson 1: “…must be that there is no “’magic bullet’” system that will ensure banking safety and soundness.”
• Lesson 2: “As Adam Smith recognized, banking is different. Thus, lesson number two must be that financial systems are not and probably never will be totally free market systems.”
• Lessson 3: “…our third lesson is that the biggest danger for financial institutions is lending based on excessive optimism generated about certain kinds of lending that are the fashion of the day.”
• * Lesson 4: “Thus, based on these insights, our fourth lesson can be that insolvent banks require government action, tailored to fit the individual situation, and the longer the corrective action is delayed the more costly and destabilized the problem will be.”
• Lesson 5: “Thus, the fifth lesson can be that our faith in our international system, despite its flaws, actually was enhanced, perhaps to our surprise. Not only was the world financial system able to survive, but during this period international regulation was improved and the supervision of the system was changed in a fundamental way.”

He goes on to discuss the Challenges Ahead.

• Challenge 1: “…is to deal with the problems left in the system by the last decade of excesses. The financial system is a bit like a chain—– only as strong as its weakest link.
• Challenge 2: “… is to move worldwide toward full disclosure in a free market.”
• Challenge 3: “… is to create effective international supervision of the world financial system.”
• Challenge 4: “… is for the banking system to operate successfully in the new technological environment.”
• Challenge 5: “… there is a final challenge and that challenge is common to all areas of our wonderful new interrelated world. That challenge is the threat of organized or even isolated acts of terrorism. The terrorists of the world of finance are not bombers but are the rogue traders and rogue institutions, like BCCI, Sumitomo’s copper trader and his lenders, Baring’s Leeson and others who can operate to undermine the system, often with cover that escapes surveillance. Today’s interrelationships are such that such rogues could seriously jeopardize an institution or even threaten the financial system in a country or parts of the world. Experience here tells us that most of the rogue traders were successful in their operations because their institutions or their regulators were inadequate in their policing of the individuals involved, or worse, were seduced by the profits the rogue produced to look the other way.”

Seidman goes on to wrap things up with this:

In conclusion, let me say there is little evidence that the future will change
human nature and its weakness for over-enthusiasm and excessive pursuit of gain
and a tendency of mankind to be secretive. Yet this aspect of human behavior lies
beneath many of the challenges the financial system has faced in the last decade.
I don’t challenge those reasonable to change human nature. But perhaps it is fair
to challenge the next generation to use technology, disclosure, supervision, cooperation
and vigilance to successfully manage the “uncontrollable.”

Unfortunately, I believe we, as the next generation, have so far failed. Hopefully we begin to heed his warnings soon.