00:00:05.340 - 00:00:19.960

opportunity to present to you Senator Robert Graham involved in the Senate Banking Committee. As we've been discussing in class, we know there are many issues facing the banking industry. It's hard not to pick up the newspaper and realized decisions these gentlemen are going to have to make on our behalf.

00:00:20.340 - 00:00:35.410

Yeah, I'm very concerned about the savings and loan situations crisis and hope you have a chance to comment on that. Also, I know the senator has been very concerned as I buy about the international debt situation in our major banks How to deal with that people.

00:00:35.410 - 00:01:03.730

Sort of thought that was over, but it wasn't just sort of delayed until the future and the future is becoming very soon, I believe forward your comments. And I know he would like to entertain your questions as he goes again. Good. Thank you very much. Uh, what I'd like to do is to ask you questions for about 30 minutes or so and then, uh, respond to those that you might have last Thursday, I had lunch with Joe Wells.

00:01:03.730 - 00:01:21.660

Joe Wells is the CEO of Sun Bank, and I told him that I was going to be speaking here today and I said, What do you think that a group of students who are about to graduate and go into the business community, many of them into financial institutions?

00:01:22.040 - 00:01:47.610

What do you think I should talk about? And his answer was history. That if you are going to effectively try to shape the future, you have to have a basic understanding of where you come from. And what are the major events that have affected, uh, the institutions that were working in our personal lives, he said.

00:01:47.610 - 00:02:14.160

Particularly right. There is a need to understand Florida history because so much of what I do as a professional and business person in Florida requires some appreciation of what shaped this state or what shaped a particular community within this state, and that there is so little knowledge and appreciation of Florida history.

00:02:14.640 - 00:02:48.400

So I have just unloaded on you the recommendation of someone whose judgment I respect, and I'd like to start with asking a question. What do you think have been the things events, occurrences, personalities, which have most affected where Florida is in 1989 beginning with the period at the end of World War two from 1945 to 1989.

00:02:48.400 - 00:03:20.650

What do you think have been the most shaping events for our state of Florida? Yes. One of the major things have been the deregulation, our three D regulations, banks following during the early eighties. Yeah, Okay. You can see I don't write too well. Okay. What? So some of the others think have been the most important factors which have shaped the state of Florida since the end of World War two?

00:03:22.040 - 00:04:06.650

Yes. Have a friend of population population growth. Thanks. Right? Yeah. Uh huh. Okay. Yeah. Yeah. Any other suggestions? Yes, I think the increasing interdependence coronations, as you see Hall. Especially global interdependence. Yeah, well, somewhere in there. Okay. Okay. Yeah, I guess. In Florida you have to look at the growth of the Latin population.

00:04:07.140 - 00:04:56.860

Latin population. Okay. I'm not interested. Okay? Yes. The increasing elderly population. Elderly. Yeah. Okay. Yes, the nature of the economy. Could you elaborate the tourist industry more than a Yeah. Okay. Yes. Florida that Miami is increasingly economically important, as opposed to formally bone increased importance of Southern Florida.

00:05:03.040 - 00:05:44.010

Yeah, 500. Okay. I think that's a good list. Let me give you what? What I have said I thought to be the five most important things that have shaped the state since the end of World War Two. One of those is mosquito control. Yeah. Yeah. I doubt that any of you had occasion to visit a place like Naples before 1950.

00:05:44.150 - 00:06:12.490

Any of you in Naples before any of you? Anywhere before nine. Well, uh, my father was in the Florida State Senate from 1936 to 1944 he represented Collier and Dade County, and I used as a boy. I remember traveling with him over to Naples, and I will tell you that you wouldn't want to spend very much time in Naples around 1940 Uh, and not very many people did.

00:06:12.720 - 00:06:34.500

I think the population of Collier County at the 1940 census was probably only a couple of 1000 people. The fact that it is today, I think the third fastest urban, uh, the third fastest growing urban area in the United States is almost totally a function of mosquito control.

00:06:34.680 - 00:07:12.360

The same thing could be true of almost all of the southern part of the state. A second closely related factor. His air conditioning. Florida was not a very pleasant place to live for six months out of the year before World War Two. Uh huh. We have become so accustomed to living in a controlled atmosphere, uh, that, uh, the repressive heat And what that did to the ability of people to, uh, to function, Uh, and the attractiveness of the area.

00:07:12.740 - 00:07:38.060

Uh, Fort Lauderdale, Miami, Palm Beach. We're strictly 100 day tourist season towns from early January until Easter. I mean, when highly a racetrack closed down, everybody went home. And part of the reason was because it was so insufferable to live in much of Florida without air conditioning.

00:07:38.940 - 00:08:00.960

A third factor would be the jet airplane. Florida was not only hot mosquito ridden, it was a long way for most places. Uh huh. It took 24 hours by train to get from New York to any place in Florida. Took two or three days if you went by boat.

00:08:01.440 - 00:08:31.360

And so if you were going to go to Florida, you went there for a for an extended period of time, the kind of instant tourism which has been so much apart of our economy, the ability of businesses and especially financial institutions to deal with the world was a function of the changes in transportation and communication, with the jet airplane being a primary factor.

00:08:32.340 - 00:09:07.760

Fourth is Social Security and other forms of of income maintenance for persons in their retired ages. Up until 1960 Florida had the same percentage of persons over 65 as did the rest of America. It's been only in the last 29 years that Florida has become what it is today, a state with a population of almost 19% over the age of 65 whereas the national averages about 11%.

00:09:08.240 - 00:09:47.150

And that's been a function primarily of the fact that people have the economic means and the confidence in those means in order to come to retire in Florida. And my fifth point is a personality, Fidel, uh, fundamentally changed the nature of the who are Floridians. Uh, and, uh, in a perverse sort of way, underscored the interdependence of our state.

00:09:47.640 - 00:10:08.160

And so I would agree with almost all the points that you have made. Uh, and I think that they have been, uh, substantially influenced and driven by those factors One of the things that's hard to appreciate is how recent and fundamental the changes to Florida been.

00:10:08.840 - 00:10:26.850

I was born in 1936. My mother was born in 19 oh, eight in Walton County. Anybody here from the Panhandle? Where is your home? Okay, well, let me when my mother was born in 19 oh eight and she was born into a probably a relatively advantaged family.

00:10:26.850 - 00:10:46.960

Her father was the physician for, uh, a few niac in 19. Oh, eight in 19. Oh, eight. Florida was the smallest state in population of the States of the old Confederacy, and it was the poorest state of the state of the old Confederacy in terms of per capita income.

00:10:47.540 - 00:11:06.560

I remember, uh, a man who is now in his eighties telling me about the fact that he had an opportunity to buy what is now Panama City Beach and turned it down because he couldn't figure out how you could grow anything on the sand of Panama City beach.

00:11:07.040 - 00:11:40.100

Well, somebody has figured out how to grow something on those sands, and it's out of that background of remoteness, of small population, of a of poverty, of what has been described as sort of a mistress orientation, that Florida wasn't a place where people thought about thinking deep permanent roots, but was rather a place to be used for a temporary advantage and where most of the things that we had to use were our resources of land and water.

00:11:40.360 - 00:11:57.520

It was a very interesting book on Florida history, called Land Into Water, Water into Land that one of the underlying themes of our state's development has been. Whatever you had, if it was land, you didn't like it, you wanted to create water. And if it was water, you didn't like it.

00:11:57.520 - 00:12:24.160

You want to create land, and this lack of permanence and lack of sustaining commitment to the state are very much a part of our history and our culture. All right, let me ask you a second question, looking not backward to the World War Two, but forward, Let's say to the year, uh, 2000 and 19.

00:12:25.040 - 00:12:45.960

What do you think are going to be the most important trends and events that are likely to shape the business environment in which you will work, live and practice, particularly if you're going to do those things in Florida. What do you think are going to be the shaping events of the next 30 years?

00:12:45.990 - 00:13:19.760

Yes. Can't escape white one from Russia. Mhm. Mm. Mhm. Okay, Yes, I might say, I think, as I was writing down some of the points that were made in the looking backward because I think some of these are worth resurrecting now in the looking forward section.

00:13:21.140 - 00:13:36.240

Yes. Uh, excuse. I'd like to start a practice of asking if you give your name in your hometown, so I can I'm John Paulson from Colorado. Florida. Down the keys? Yeah. One of the things I think is going to be is the services that we're gonna need for aging elderly need.

00:13:36.250 - 00:13:58.750

Especially baby boomers. Florida becoming a retirement, Biggest nations retirement needs. Especially going to use it. Two Mhm. Yeah. Okay. Very good point. Yes. My name is Dan. Sometimes not quite so easy, but I'll have Where's your hometown? Stand up north, but okay. I mean, listen, the president has six or seven.

00:13:58.750 - 00:14:17.230

You can have to it. Okay. You are okay. I think that one of the major major factors is going to be the development of the bullet train. or something like that would be able to link up in cities of the things that really very long. I think you take care.

00:14:18.440 - 00:15:05.260

Mhm. Okay. Yeah. Mike Ledbetter from the kind of each financial services to foster greater mhm. Could you elaborate on that, Mike? Yes. This is Yes. Yes, yeah. Mhm, actually. First service. Okay. Yeah. This may come as a shock when you see my penmanship. But when I was in the fifth grade, my fifth grade teacher, Mrs Williams said I had absolutely the worst penmanship that she had ever experienced in her 30 years of teaching the fifth grade.

00:15:05.740 - 00:15:28.540

And so she assigned me the job of taking a magazine article and writing it out in cursive is an effort to improve my handwriting. And there was a famous football player at the University of North Carolina, then named Charlie Choo Choo justice. So I laboriously, over a period of a couple of weeks, rode out that whole article, I and now the world's leading expert.

00:15:28.540 - 00:15:59.560

At least I was for a time when Charlie Choo Choo adjusted. It obviously didn't have much positive effect on my hand. Right? Any other, uh, any other point Yes, right? Yeah. He said Philip Rosedale, the service industry as of all hospitals. Okay, right. Less administration. Yeah.

00:16:01.940 - 00:16:21.560

Okay, yes. Bring the fun. And I'm from chatting with that person. And I think that in addition to that, there is going to be increased competition within the service industry with, like, going back. And because so, actually, the students and they have to find their deer and professors more.

00:16:22.040 - 00:16:52.430

Okay. Again with that, uh, more more focused. Unless comprehensive institutions. Yes, I think, as a function of our increased population growth or growth and financial services in our proximity to Central and South America, Florida's can continue to be and will probably be the biggest southeastern economic power.

00:16:54.840 - 00:17:39.350

Just sort of for my first. Who's Mm? Yeah, yeah, yeah. L a. And this is needed lower Alabama. Which is what some folks from Bruton called the Panhandle or Los Angeles. But Latin America, Any others? Yeah. Boy drifting off ST Petersburg. I think we're gonna need to address the drug problem that, but that's more mhm.

00:17:39.740 - 00:18:06.620

Well, I think we have a very thoughtful list. One of the things that I think you can see is how much this list has influenced that list. That is, that our future is, as Joe Wells had said, very much a function of evolution, of trends from the past, and therefore having an understanding of where we've been is critical to where we're going to go.

00:18:06.620 - 00:18:28.060

Let me just pick a couple of these to comment on. One is the services for the elderly. An interesting and, I think, largely unconscious thing has occurred in this nation, and that is that we have developed a bifurcated system of social services and that bifurcation has two dimensions.

00:18:28.540 - 00:18:55.660

It's aged driven, and it is government responsibility driven. Ah, state and local governments are now responsible for youth in America. The federal government is responsible for our older citizens. The last year I was in Tallahassee, we did an analysis of the state budget. In response to this question.

00:18:56.140 - 00:19:31.270

How much of the state budget can be assigned to an age group within the population that is responsive to demographic changes? And the answer was about 80% of the budget could be assigned to some age group, and we didn't force that as an example, we one area that was in the 20% was the state park system because we couldn't divine a particular rationale that it was being driven by demographic changes.

00:19:31.940 - 00:20:04.060

But 80% uh could be, and about 80% about 75%. We're from people from the age of less than zero 2, 24. And, of course, the biggest share of that was education and then behind that. Much of our social service and welfare programs are aimed at, uh, maternal immediately after birth and early childhood experiences.

00:20:04.440 - 00:20:25.260

Unfortunately, a lot of our criminal justice system, because better than 50% of the people who are in our state prison system fall into that 0 to 24 categories. And so changes in that population group are very significant in terms of what the state budget circumstance is going to be.

00:20:25.740 - 00:20:52.960

On the other end, less than 5% of the state budget went to people who were over 65 and that is in a state where 19% of the population is in this category and approximately 27% of the population is in that category. So you have this big rescuing of state responsibilities towards youth.

00:20:53.440 - 00:21:33.690

If you did the same analysis at the federal level. And I can't give you, uh, with this kind of precision, you'd find almost the reverse, uh, Social Security, Medicare to a substantial degree. Medicaid are all targeted at that over 65 age population. Whereas, for instance, the whole federal budget for education this year under the budget that was announced, uh, Thursday by President Bush's recommending about $36 billion out of a budget of 1.2 trillion, somebody could tell me what that is.

00:21:33.690 - 00:22:16.360

I think it's about 3% uh, of the whole federal government goes for the most basic service that relates to the youth of our country. So what does this say for Florida? It says that Florida is especially interested in and vulnerable to changes in federal policy relative to the elderly because with our large elderly population, yeah, the federal government, for instance, began to erode away Medicare or Social Security or failed to take steps to assure that private pension and retirement systems are well financed.

00:22:16.740 - 00:22:44.960

Our state, more than any other in the union, would be adversely affected because we'd be held responsible for the cost of the then larger group of indigent elderly who would be looking for state and local, uh, financial support on this issue of the increasing economic power of Florida as a result of, uh, of what's happening in Latin America.

00:22:45.540 - 00:23:13.960

Uh, in this same conversation with Joe Wells, what do you think he suggested would be the single event that might occur in the next decade that could have the most positive effect on Florida's economic growth? Okay, anybody want to suggest what Joe Wells thought that candidate was she will bring up again?

00:23:14.840 - 00:23:51.670

Uh, no. Yeah, absolutely. Settling the Third World debt problem could be an event which could quickly release tremendous economic energy, of which our state would be primarily affected. Uh huh. Example. If Latin America was importing US agricultural, industrial and goods and services at the same rate today that it was in 1975 our trade deficit would be one third less than it is today.

00:23:52.040 - 00:24:31.140

Enormous influence. Uh, and that would be particularly felt in Florida, which is increasingly seen as the nexus between North America and South America. There's an interesting book called The Nine Nations of North America and the author of this book Redraws the map of North America. which he sort of loosely defines as being Canada, the United States, Mexico, through Central America and the northern edge of South America into what he thinks are the nine relevant nations.

00:24:31.140 - 00:24:56.850

From a economic, cultural political standpoint, one of those nine nations is called the islands, and that nation includes the northern coast of South America, all of the Caribbean and the southern tip of Florida and the capital of the islands is Miami. And it makes a very persuasive case that that is, uh, an integrated economic and political and cultural region.

00:24:56.860 - 00:25:16.230

And a lot of the, uh, pluses or minuses within any section of that region is gonna depend upon the overall health of the area. It's been my belief that there's there are a number of things that the United States can do. These are the Latin America and the Caribbean.

00:25:16.250 - 00:25:38.270

But one of the things that we no longer have the option of doing is forgetting about it, because if things go badly through indifference and neglect, we, and particularly those of us who are most proximate, are going to pay a very heavy price, whether it be in drugs or refugees or lost economic opportunities.

00:25:38.940 - 00:26:08.670

Uh, and that again is an especially important issue for our state of Florida. Uh, I'd ask you enough questions. Uh, do you have any questions that you'd like to fire? Yeah. Yes, the Senate Banking Committee doing about balance sheet activities. Uh, the answer at the present time is like most other things that are happening We're studying.

00:26:09.240 - 00:26:48.120

Uh uh, If you're talking, are you talking about off balance sheet activities In terms of the federal government terms of what banks are doing right now Charities, things of that nature. Well, the main thing that we're doing in the in the financial accounting of financial institutions level is to try two, bring the regulation of the thrift industry one under, uh, of the supervision of the institutions that have been involved with commercial banking, particularly the f d.

00:26:48.120 - 00:27:18.560

I C. And second, to establish more consistent accounting practices as between the thrifts and the commercial banks and the effect of that for the thrift industry, for instance, in terms of their capital structure, where today they have a more liberal standard of treating goodwill and counting that towards meeting their minimum capital requirements, they would have to meet the commercial banks standards?

00:27:19.840 - 00:27:45.360

Mhm, Yes. Keeping alive with the same idea. Do you see some reregulation of the savings and loan industry? Well, that, uh, someone had suggested. In fact, the first point in looking back was deregulation. I think that's also going to be an important issue. Looking forward, uh, we've been through a period in which we've been operating as if there were two poles.

00:27:45.530 - 00:28:16.960

One poll is a totally lazy, fair marketplace, and the other one is a highly government regulated close to a socialized or socialistic Lee directed economic system. Uh, I think that what we're going to have to recognize is that there is a role for both. When I was a strong supporter, for instance, deregulating transportation, we used to have in Florida very tight controls over the trucking industry.

00:28:16.960 - 00:28:36.680

If you wanted to to haul the furniture from Gainesville to Ocala, you had to get a state permit in order to get a state permit. You had established that there was some deficiency of services which meant that all the people that were already hauling furniture from Gainesville, Ocala, would come in and object to you getting permission.

00:28:36.700 - 00:29:01.180

And if you were lucky enough to get a permit. You then had to to get a rate set by a state agency. A very closed, access, cumbersome process. Well, that's all gone now, and you can easy entry and marketplace rates. One thing that we didn't do was deregulate safety.

00:29:01.190 - 00:29:24.960

We understood that while people wanted to have more competition and who provided the service and marketplace rates, they also want to be sure that the trucks were safe, that the drivers knew how to drive the trucks and other things that were typically beyond the control of the ability to influence or two in some cases, even understand of the customers.

00:29:25.340 - 00:29:45.730

I think that we failed to make that distinction in a number of areas of deregulation, with the S and L industry being one prime example. At the very time we were economically deregulating thrift industry, we cut the supervisory framework, the number of auditors, inspectors and other people.

00:29:45.730 - 00:30:22.170

We changed accounting standards to make them less rigorous. Uh, there was a relationship between the industry and the regulators. Uh, that didn't lend itself to vigorous oversight. The Congress got involved politically on behalf of some people who didn't deserve to be in the industry and all of those kinds of failures to have an effective regulatory system at a time that we were moving towards marketplace has now left us with $100 billion a bill to be paid.

00:30:22.640 - 00:30:47.460

So I think that one of the one of the challenges is going to be to understand the last decade of deregulation and how we can more effectively Mary government regulation of those things which are government responsibilities while still maintain the benefits of the maximum degree of competition and marketplace influence.

00:30:49.340 - 00:31:11.260

Yes. Would you give me your name from ST piece? Yeah. Mhm. How much exposure the Florida banks have to the Latin American countries as opposed to the big Yeah. Relatively little, uh, Florida banks would be in the category that are generally referred to as the regional banks in Third World debt.

00:31:11.640 - 00:31:38.360

Uh, the regional banks, as a group, have had less exposure to begin with and have been more willing to take their losses and get out, then have the money center banks. Uh huh. The Florida Banks, when they were in, uh, Latin America and other Third World indebtedness tended to be more in it.

00:31:38.370 - 00:32:09.620

for trade financing rather than financing of a sovereign government. Uh, Walter Wriston, who was the president of Citibank for a number of years, had a philosophy of lending to nations that a country can't go bankrupt. Well, that may or may not prove to be a true statement, but we certainly have found out that, uh, countries can refuse to pay principal, refuse to pay interest and do a lot of other things that make loans to them.

00:32:09.850 - 00:32:38.320

Precarious. Florida banks didn't follow that philosophy as well as their regional counterparts throughout most of the South and the, uh, and other sections outside of the money centers in California and New York and therefore have not been as affected by the debt issue. Mhm. Yes, now that we have the money is more cushion for Miami.

00:32:38.320 - 00:33:12.050

Come on. Now we have the Southeast interstate banking. All the banks from Northern come down and bought out banks in Florida. In retrospect, you think it's a good idea to have the Southeast banking. Yeah, and let me roll the camera back 1980. There was a great deal of interest in National Interstate banking in which the banks would be authorized to branch across all state lines.

00:33:13.300 - 00:33:56.770

My concern was, what is the purpose of a financial service system? I answered that question. That the purpose of a financial service system was to serve the needs of the general public, that we had to look at this from the perspective of the public, not the financial institutions, and that I felt the general public was best served by having a system that not through government regulation or protection but through the strength of the marketplace would give to the public the maximum number of options as to where to secure financial services.

00:33:57.240 - 00:34:15.860

It wasn't very long ago in Florida that if you had any scale of financial services to be conducted, and particularly if you had any complexity, that you had to go out of the state to do it one of my first work days, I think it was workday number five or six.

00:34:16.240 - 00:34:45.780

Was it a place called Continental Apparel Factory into few NIAC Springs? Demand that that ran that in 1977 told me that he did his banking out of Philadelphia, and I said, Why are you doing your banking from the few NIAC springs out of Philadelphia. The answer was that he couldn't get a Florida bank to understand some of the subtleties of financing for a garment manufacturer.

00:34:46.000 - 00:35:08.160

And he found it easier to use Philadelphia than to try to educate his, uh, local bankers. Uh, I think that, uh, that circumstance has largely changed. One of my concerns was that if we had National Interstate banking in 1980 we would end up in Florida with two types of institutions.

00:35:08.740 - 00:35:40.900

One would have had the what I would call the community bank that, uh, is an economic survivor because it is able to provide a high level of service is almost a a boutique type service that people are willing to pay for. And second, you would have the Florida outpost of money center banks and that what a Citibank would have done in 1980 would have been to Barnett.

00:35:40.980 - 00:35:59.260

And that would have become Citibank, Florida, and Chase Manhattan would have bought Sun Bank, and that would be Chase Manhattan, Florida, et cetera. I felt that what we needed to try to do is to have a system that would allow for three tiers of institutions to be marketplace survivors.

00:36:00.230 - 00:36:24.350

Those community banks and the money center banks that are going to come but also a middle tier of statewide institutions, which were big enough to fill the needs of the uphill manufacturing nephew, NIAC Springs, but still had some sense of a specific Florida or regional identity.

00:36:24.830 - 00:36:55.160

So the question was, How do you shape the environment in a way that gives you the most hope of achieving that objective? And the answer that several of us came, uh, to was to allow banks within a region of the country which had a high degree of economic and cultural and political affinity, to work across state lines so that they could become large enough that when National Interstate banking arrived, they could survive.

00:36:55.530 - 00:37:42.350

And that was the essential policy premise of the effort in the Southeast, at about the same time in New England, and subsequently in other sections of the state to allow banks to, uh, to branch across state lines. I think it's been very successful. Uh, we now have in the South five or 10 banks that almost under any circumstances of national competition are gonna be survivors, and therefore we'll have that many more opportunities for the public of Florida and other Southern states to choose as to what kind of financial services they want and what relationship they wish to have and are willing to pay for relative to their financial institution.

00:37:44.630 - 00:38:10.940

Yes, what do you feel personally is the most important issues that you'd like to address this, and well, from the Banking Committee standpoint, I think the the three big issues are going to be the thrift industry question. The Third World, that issue and the next step of deregulation or restructuring of financial institutions.

00:38:11.320 - 00:38:30.170

We spent a lot of the last couple of years on the question of the Glass Steagall Act. What degree should banks be allowed to move into the securities industry? That issue has kind of gotten pushed in the third place now because of the emergence of the thrift and the Third World debt emergencies.

00:38:30.300 - 00:39:02.390

But I think those are going to be the three big questions until either they're resolved or some other crisis pushes them aside. One. One lesson that we're learning about the thrift industry, which which I would suggest, is a lesson of basic human psychology, and that is there is a tendency to think that if you don't deal with the problem today, you will learn more about it and therefore be better able and equipped to deal with it tomorrow.

00:39:02.400 - 00:39:40.410

Or maybe the problem will go away. Or maybe somebody else will solve the problem. My experience has been the tendency is that very few of any of those occur, and what happens in fact is the problem gets worse and more difficult to deal with. And there's a tendency for some unexpected crisis to emerge, which will shoulder your problem out of the way, uh, and allow it to fester and become worse yet, uh, to apply that principle to the issues we've just been talking about.

00:39:40.410 - 00:40:23.820

I think that we could have dealt in a way that would have moved the Third World debt question towards resolution. Uh, we could have dealt with that problem three or four years ago, and I think have been well on the way to resolution today. But because we didn't, uh, we also failed to deal with this thrift crisis, and now it's exploded all over, and it has become the dominant issue, and the Third World debt question has been laying there, getting more serious but not getting the first priority attention because his other crisis has overtaken him.

00:40:25.610 - 00:40:43.210

Yes, I have a question on the physical thing. One more step. Many analysts are now saying no, we all look at this. You know how big the price tag was. And President Bush has put it at $50 billion or 100 million by the time you count the last last support the analysts.

00:40:43.220 - 00:41:04.830

Many analysts are now saying that wasn't enough. The New York Times Just several The committee looked at that issue. Is there gonna be enough money put aside or are we in fact putting this thing off again for three or four more years? Yeah, I think one of the things that the Committee is going to want to do is to try to deal with this issue one time and not have it nibble us to death.

00:41:05.410 - 00:41:24.140

And I say that out of the out of a historic context in which that's the way in which the federal government has been dealing with this S and l crisis. We've had several bailout plans in the last five years, which were all supposed to be a solution which have proven to be inadequate.

00:41:24.370 - 00:41:50.870

We had a hearing 10 days ago at which the head of the General Accounting Office testified as to what he thought the scale of the problem was. And he said that he felt it would cost about 35 billion mhm to pay off the some 220 institutions which were closed down, many of them.

00:41:51.330 - 00:42:22.820

In December of 1988 he felt that there would be about another 30 billion two pay off the next. This is this is for 220 institutions the next 315 which are referred to as these. All of these are insolvent, uh, and the next group, which are referred to as the Sliding Institutions, which is probably another 500 plus or minus.

00:42:23.500 - 00:42:51.820

He put down five billion and then let's see, that's 70. He had a 15 billion for F B I C. To build up the reserves of F. D. I C. I think that totals to somewhere in the neighborhood of 80 to 85 billion. Uh, most people have been focusing on this number, feeling that the cost of the sliding institutions is likely to be substantially higher than the five billion.

00:42:52.200 - 00:43:18.230

And what the president has proposed to do is to finance this through a combination of borrowing by a newly newly created federal agency. The interest in principle of that borrowing to be paid off by a combination fees paid by the thrift industry and appropriations from the treasury.

00:43:18.900 - 00:44:01.610

One thing which is just being recognized is that we've already added $11 billion to this number, which is the estimated cost of closing these institutions, which is not a future cost but is being added to the current the fiscal year 89 budget. So whereas we thought we were going to end up with a budget deficit of about 160 billion, it now looks like we'll have over 170 billion with that last 10 plus being the the immediate cost not to speak of the future payout cost of those institutions that have already been closed.

00:44:02.390 - 00:44:34.510

Uh huh. One of the things that the uh analysis that has been done of the Bush plan indicate that it will be very heavy carrying cost to paying this thing off over a 20 or 30 year period and that when you add up the the interest that will be required to finance this, that we're probably looking at a figure of in the range of 100 25 $235 billion as the cost of the of the plan and that assumes.

00:44:34.890 - 00:44:56.220

But that that the sliding institutions only have a five billion cost. Yeah, I think I understood you to say that that friend, because in two ways, one by treasury and one by the industry itself, a number of breakout, uh, the plan that the president submitted would have been financed.

00:44:56.590 - 00:45:20.010

His numbers were 60% from the S and l's and 40% from taxpayers. The difficulty is that this 60% is more or less based on a fixed quantity. And that is how much money can you expect the S and L's to pay in premiums into the insurance fund?

00:45:20.790 - 00:45:48.910

Uh huh. And if that number falls below what's expected or if the cost of the system is more than has presently been projected, all of that will will be in the taxpayer column, one of the one of the regulatory changes which the president's recommended that I strongly support, and it's I had introduced some legislation on this a couple of years ago.

00:45:50.190 - 00:46:10.590

Currently, the Federal Home Loan Bank Board, which is the regulatory agency, and the Federal Savings and Loan Insurance Corporation fizzling, are the same. People in the same three people meet in the morning in one capacity meet in the afternoon. The other capacity. That is not the case with commercial banks.

00:46:11.080 - 00:46:42.710

The regulation of the commercial banks is done by the Comptroller of the Currency and the Federal Reserve Board. The insurance fund is under a separate entity with separate human beings, called the Federal Deposit Insurance Corporation. One of the of the many conflicts which I think the merger of the regulatory and the insurance function has caused to the thrift industry relates to the issue of Where does Fizz Lick get its premiums?

00:46:44.080 - 00:47:11.290

Where does physically get its premiums? What are the premiums based on? Just a straight a million positive? That's right. They are based on a percentage of deposits, which today is roughly 20. I think today it's about it's, uh, it's 22 basis points. Now it's gonna go up to about 24 then we'll go down to 18, I think, in 1991.

00:47:11.780 - 00:47:37.220

Uh, so if you are in the insurance part of this business, if you're the fizz lick, you have a big interest in having deposits be high in the covered institutions because it's against the quantity of those deposits that these percentages are applied. But what if you're a regulator and you say that's a dead institution over there?

00:47:37.310 - 00:48:02.040

I want to close it down and take those deposits off the books. You have a very serious conflict of interest, with the regulator being constrained from taking steps that might constrict the deposit base when he knows, as as an ensure that that's going to make his problem of financing uh, that much more difficult.

00:48:02.050 - 00:48:26.200

So I'm a strong supporter of the theory that we need to separate those functions and have different people looking at what those issues should be from the perspective of regulation, another group of people looking at them from what they should be for insurance purposes. Yes, right.

00:48:26.870 - 00:48:48.690

I'm gonna go. You brought up the glass people. Yeah. What do you say? Having well, I mean, I can answer the question he 10 years from now, I think the Glass Steagall Act will be substantially history, uh, as to how we get from here to where we'll be in 10 years will probably be an incremental process.

00:48:49.070 - 00:49:17.090

What had been suggested in last year's bill that passed the Senate was that the securities functions be placed into three annual categories. That in year one the banks would be allowed to, for instance, do mortgage back securities mutual funds and, uh, mhm revenue back a state and local bond issue.

00:49:17.940 - 00:49:39.890

In Year two, the banks would be allowed to do, uh, debt financing for corporations and, in year three equity financing for corporations, which essentially at that point you have dismantle Glass Steagall. Uh, one of my concerns in that phase end was to go back to the deregulation point.

00:49:40.670 - 00:50:08.580

Today, there are approximately 2000 security institutions in America, and about 10 of those 2000 do 80 or 90% of the business. There are some 13 to 14,000 commercial banks in America, which would be theoretically entitled to set up a securities uh uh subsidiary and go into securities business.

00:50:09.060 - 00:50:36.990

I was concerned that the regulators, particularly the Securities Exchange Commission, would have enough lead time to get their capacity up to the level that would be required to be regulating not 2000 institutions, but 15 or 16,000 potential institutions. And this phase in was in part designed to give the SEC that lead time.

00:50:39.660 - 00:50:59.280

So my answer is, I think that 10 years from now, Glass Steagall will probably essentially yeah, the past history. Uh, but I think it will come in a series of phases with one of the key factors in that phasing being appreciation of the impact of this on the regulatory.

00:51:00.460 - 00:51:18.180

Yes, I have a question. Do you think there's any way for the government to make United States banks more competitive in the world arena? Or do you think it's more a domestic problem that we have to do? Uh, I think that it is primarily a domestic problem.

00:51:18.890 - 00:51:46.690

There are some steps underway, which have as their goal to reduce some of the differences between European, Japanese and U. S. Banks. European banks are, and I am now beyond my level of economic history. But apparently they've had a tradition of of being more venturesome or being allowed to be more venturesome than US banks.

00:51:47.820 - 00:52:20.370

there is a new proposal which would attempt to establish consistent capital requirements for the G seven countries Japan, Canada, the United States and the major European countries over the next four or five years. One of the issues that has come up in the Third World debt uh huh, circumstances is that the Latin Americans feel, and I think, with some legitimacy, that the European banks have been more cooperative than the United States banks.

00:52:20.370 - 00:52:48.680

And part of the reason for that cooperation has been regulatory. For instance, a U. S Bank. Let's say that owns $100 million of Argentine debt, and it wants to use 20 million of that 100 million for a debt for equity swap. And if the effect of that would be to recognize that that last 20 million wasn't worth 20 million, but only worth 10 then under U.

00:52:48.680 - 00:53:14.820

S banking practices, the bank would have to write down the other $80 million to 40 million. That is, once you've recognized that a part of your debt is less than its book, you've got to write down all the debt to that lower figure. Europeans don't have to do that And so they've been more willing, uh, to, uh, to engage in some of these measures, another differences in our tax law.

00:53:14.830 - 00:53:33.460

And this is a relatively new change from the United States. Ah, if a bank reserves for bad debt, if you suspect that your Argentine debt is only worth 50 million instead of the 100 you put 50 million more into your reserves, you don't get to take it as a tax.

00:53:33.470 - 00:53:57.060

Uh, don't get to recognize it for tax purposes at that point, but only when you actually incur the loss. If you sold your 100 million into the secondary market and got 50 back then you could take the 50 million tax write off. The Europeans, uh, in their tax system, are able to take it as an expense at the time that they reserve for it.

00:53:57.070 - 00:54:19.660

And so that has given them, uh, some additional either encouragement or has removed a disincentive to deal with their third world debt problem. So I think the problem is fundamentally got to be dealt with here at home. But there are some some refinements and some efforts underway to try to make the international playing field a more level.

00:54:21.140 - 00:54:46.560

Senator Graham is a busy schedule. We'll come ask questions for you. Yes. What are the proposals up on the board right now to help get out of there? Well, I've suggested a couple that would relate specifically to the banking industry, and that is, uh, to allow us banks to operate more on parody with European banks and how they treat third world debt.

00:54:47.040 - 00:55:17.550

Uh, most of the focus of interest, however, has been on how to internationalize this depth through creating some entity that can a purchase debt assist the debtor countries and paying it off. Uh huh. To use the Argentine example that I did. And the only thing wrong with my example instead of $100 million being worth 50,000,100 million is probably worth about 15 million if you can get anybody to pay you 15 for it.

00:55:17.940 - 00:56:20.160

Ah, One of the difficulties is that if if you banker sell you $100 million to a secondary market for 15 million, that doesn't help Argentina. And because they're still expected to pay off 100 million. So one of the proposals to try to create, uh, a new international entity or to use one of the existing international institutions, such as the World Bank, as a middle man who can buy the debt at its market value and then through some form of financing, such as what are called exit bonds, which would be bonds issued by the debtor country with some greater security probably guaranteed by an international agency, uh, to the secondary purchaser to pay off these debts at their current market value.

00:56:20.630 - 00:56:43.910

There was a very interesting article in the Wall Street Journal a week ago Friday on applying Chapter 11 bankruptcy, uh, concepts to dealing with the Third World debt. Uh, and that is very similar to the role of this international entity would be very similar to what a bankruptcy court does if a private company gets into a situation that it can't pay off its debt.

00:56:43.930 - 00:57:12.850

I think another thing that's important nationally and particularly important to Florida is to be able to create an environment in which there'll be some new capital coming into Latin America. Here is a ticking time bomb. Brazil has a population of about 120 million people. Of that population, 50% he is under the age of 18.

00:57:13.630 - 00:57:44.750

Uh, I mentioned that Florida had 27% of its population under 20 for Brazil's got half of its population under 18. In order to have a sufficient economic growth to provide employment for this youthful population and to service its external debts, Brazil has got to have a GNP growth every year of in the range of 5 to 7%.

00:57:45.430 - 00:58:11.450

Mhm. Last year, I think they had a GNP growth of less than 1%. Uh, and if you've been reading any of the stories about the tremendous inflation and and other problems that they're facing right now, they may be lucky to make that in 1989. Uh, and so the consequence has been that there has been a precipitous decline in the standard of living in much of Latin America.

00:58:11.820 - 00:58:39.150

Um, I don't think any of us here can recall the depression. Um, uh huh. But what is happening in places like Argentina would make what was happening in the United States in the 19 thirties look to be fairly mild. Uh, and that is a circumstance that creates tremendous instability in the population.

00:58:39.520 - 00:58:59.590

Ah, it happens to be at a time when they are going to be national elections. In many of these countries, we've already had an election, uh, in Mexico, where for the first time since the Mexican Revolution, there was a serious challenge from the left to what has been the consensus party in Mexico.

00:58:59.640 - 00:59:33.620

Many people feel that the next Mexican election will elect a much less us, uh, allied government in Venezuela. Carlos Andres Perez, who has indicated that he puts Third World debt at the top of his national agenda, uh, and is talking about creating a cartel of, uh, debtor nations to try to deal with this has now been returned to power in Jamaica.

00:59:33.620 - 01:00:16.910

Last week, Manley, who had been a very pro Cuba socialist leaning prime minister, got 60% of the vote against uh the Aga, who had been a very strong ally of the United States and a strong supporter of of an entrepreneurial solution to Jamaica's economic problems Coming up, we've got Argentina where right now it looks as if the Peronist candidate is going to be elected and would take the place of Alphonse Seen, who has been a strong US supporter and has tried to to operate in a cooperative spirit to Brazil will have elections in the next year, year and a half.

01:00:16.920 - 01:00:46.330

So all over the continent, we are poised to pay not just a, uh, short term, but potentially for the balance of this century price for not coming to grips with this debt issue. And I, uh, are hearing last week, uh, one of the economists describe this as being the monster at the gate of Latin America before you can get through to deal with any of the other problems.

01:00:46.910 - 01:01:14.830

Economic growth, political stability, democratization, human rights that this big monster of Third World debt is at the gate. And hi. I think that clearly the United States has got taken world leadership in slaying that monster or the monster has the potential of not slaying us, but leaving us with a lot of permanent scars.

01:01:16.510 - 01:01:39.640

Thank you. Thank you very much. I feel like we've all learned from you. Thank you. The mhm The class was turned upside down. The answers The first half the class were a lot better than the answer. The second half. Thank you very much. Yeah. Mhm. Yes.

01:01:40.310 - 01:01:41.830

Oh, please. Somebody