Barron's News on Y2K [not too positive]
De-bugging the Thrifts
The threat from the Year 2000 problem may not be as big as it looks
By Jim McTague
Up to now, few stocks have experienced the nasty sting of the Millennium Bug, a rampant date-recognition infestation in system software that could cripple critical government and private-sector computers beginning January 1, 2000. Nevertheless, thrift-institution shareholders ought to brace themselves. The industry could get a dose of the bug's venom this Wednesday, when Ellen Seidman, director of the federal Office of Thrift Supervision, is due to testify about the potential crisis before the Senate Subcommittee on Financial Services and Technology.
Seidman, who regulates 1,200 federally chartered thrifts, plans to discuss the results of on-site examinations of institutions conducted specifically to see if they will become Year 2000 -- or Y2K -- compliant by the end of this year, a deadline set by federal regulatory agencies for all financial institutions, including banks, S&Ls, brokerage firms and credit unions. Her testimony, she conceded to Barron's last week, could roil the market if the popular press dwells on the bad news. She declined to share the details but indicated this much: It's really no cause for investors or depositors to run for the exits. Thrifts as a whole are not as unprepared for Y2K as Seidman's numbers will indicate. That's because this go-around, Seidman's Y2K teams examined only the institutions they perceive as the most lax in addressing the millennium-bug problem. So, says Seidman, the numbers will be colored by adverse selection.
These laggards, predominately smaller thrifts with small Y2K budgets, represent a low percentage of federally chartered institutions. Diane Casey, national director of financial services for the accounting firm Grant Thornton, asserts that few if any banks, thrifts or brokerage houses are likely to fail because of millennium-bug infestation. Though a recent Grant Thornton study faulted thrifts for not realistically budgeting enough to fix the problem, that doesn't mean they won't eventually pony up the money.
Paul Schosberg, president of America's Community Bankers, a thrift trade group, predicts that federal regulators will close an institution for Y2K compliance problems sometime during the third quarter, a ritual execution to set an example for the rest of the financial-services industry.
But Seidman sees her job as preventing institutions from failing: "If my kid is an A-student in Latin and one semester he brings home a C, we sit down and work together very hard to bring that grade back up. We don't say, 'Oh, you brought a C home, let's shut you down.' "
That's why Seidman will not name names next week and risk runs on deposits and capital. "At some point along the way," she predicts, "there will probably be some formal enforcement orders, which of course are public. But basically our strategy here is to try to get people moving so that we never have to take that step."
Seidman is a lawyer with an MBA whose voice is a ringer for actress Teri Garr's. She went to OTS from the President's Council of Economic Advisers last October. Before that she was senior vice president for regulation, research and economics at mortgage giant Fannie Mae.
When she arrived at OTS, she shortly discovered that her padded desk chair was a political hot seat. The Y2K problem is only part of the reason. Over the past five or six months, the federal unitary thrift charter has become a red-hot item among insurance companies and commercial firms desiring to breach Depression-era bans on the mixing of banking and commerce, so they can enter the consumer-banking and credit market. This has upset members of Congress, including Republican Jim Leach of Iowa, chairman of the House Banking Committee, who see systemic dangers posed by the unrestrained mixing of banking and other businesses. Leach, the Federal Reserve System and the commercial-banking industry favor legislation moving through the House that would eliminate new thrift charters and allow a bank to derive no more than 5% of revenues from the ownership of commercial firms.
Existing thrift charters would be grandfathered, but with this unattractive proviso: Stockholders would never be able to sell the institution. The odds of the bill becoming law this year are slim-to-none. There are only 75 legislative days left in this Congressional election year, and all but 23 days are earmarked for appropriations bills and high-priority legislation.
A Change in the Rules
The unitary thrift charter permits the unlimited affiliation of commercial firms with thrifts and allows thrift holding companies to affiliate with other kinds of financial institutions, like insurance companies and brokerage firms. It also allows interstate branching. Until 1997, the charter had enough disadvantages to limit its attractiveness. Thrifts paid higher deposit-insurance premiums than commercial banks, making it more difficult to price their products competitively; and most of their loan business had to be directed toward |
