The coming banking scandal.

• Author: Spring, Tom

AT THE BEGINNING of the last decade, Edward Kane, one of the nation's leading banking experts, began shouting his warnings about a looming crisis in the national savings and loan industry. Few people listened.

As early as 1980, Kane began calling for a reform of the Federal Deposit Insurance Corporation (FDIC) that protects depositors' savings, up to $100,000 per account, if their bank or savings and loan should fail. A prolific writer on the S&L and banking industries, Kane warned that regulators were underreporting the number of savings and loan firms in financial trouble. Moreover, they were underestimating how much money would be needed to pay off depositors if those institutions failed.

He maintained that the way banks and S&Ls were monitored and regulated needed to be changed as well. For example, the Federal Savings and Loan Insurance Corp. (FSLIC) charged all firms the same small rates for insurance, regardless of how risky an individual S&L, or thrift, was. There were other questionable practices as well.

Kane's fears were borne out. His advice, however right it eventually proved, went unheeded and, in late 1988, the well went dry. The collapse of the FSLIC forced the Reagan Administration to call for a taxpayer-funded bailout of the system just weeks after Pres. George Bush was elected.

He also accurately predicted the shutdown of the Ohio Deposit Guarantee Fund that occurred in 1985. That agency, which insured state-chartered savings and loans, became insolvent when Home State Savings of Cincinnati went belly up, depleting the agency's resources and leaving depositors' funds in other member institutions unprotected. Depositors went without their funds for several weeks until the S&Ls could obtain Federal insurance or merge with other, Federally insured institutions.

Today, Kane, professor emeritus of economics, Ohio State University, now Cleary Professor in Finance at Boston College, is warning of yet another impending crisis--one that could be even more ominous than the S&L disaster. This time, it involves the banking industry.

There are perhaps six times as many banks in the U.S. as there are savings and loan institutions. Their assets total about 3.2 trillion dollars, better than three times the size of the estimated $900,000,000 in assets of the S&Ls.

As of Oct. 31, 1992, the government labeled 927 of the 12,121 Federally insured banks and savings banks as "problems." That is, they are seen to be

weak enough to threaten losses to the FDIC. Compared to the savings and loan industry, where more than one in five thrifts shut down, that percentage is small. Measured in terms of potential losses to taxpayers, however, it is painful enough.

Between 1980 and 1991, 1,073 S&Ls failed. The losses to taxpayers totaled 119,000,000,000. During that same period, an even larger number of banks went under, but these institutions were small, with many based in rural or agricultural communities. Total losses to taxpayers from 1,381 bank failures were $33,000,000,000-less than one-third of the cost of failed thrifts.

In 1992, more than 100 banks closed their doors. Even so, some regulators say the problem with the problem banks isn't that bad. They say the FDIC's Bank Insurance Fund can bail them out. Kane disagrees.

Taxpayers already are stuck with a bill for about $55,000,000,000, he told the Senate Banking Committee during hearings in October, 1992. That's equal to the budget for the U.S. Department of Agriculture.

While the number of dollars is huge, the damage is much more than that. Closed banks mean employees out of work and fewer sources of money for business ventures and consumer loans.

Like their counterparts in the savings and loan industry, bank regulators and managers aren't properly accounting for all the losses, Kane maintains. As a result, regulators aren't accurately portraying the growing exposure of the Bank Insurance Fund to losses they are...