FRB - Oral History

  • (p34) - Ettin. If you go too far in insuring or regulating, what you create is a moral hazard where the market participants themselves don't worry about the risks being taken, because they expect “Uncle Sugar” to bail them out. 
  • (p37) - Ettin. With the deposit proceeds they could then raise, the
    thrifts—most of which were economically insolvent, and all of which were illiquid—went out and bought these risky assets, taking a bet that they can make enough money to rebuild their capital, pay the high rates, and live through this period. There was, of course, no market discipline because of the insurance and immense moral hazard.

    • This was an absolute total failure of regulation, of which the Federal Reserve participated. The Federal Reserve participated by not opposing a rise in the insurance cap to $100,000, which I think was an oversight. The only Federal Reserve commentary on this is in the appendix in testimony by Chuck Partee, and the Fed didn’t take a critical position
  • (p37) - Ettin. Moreover, as with all supervisors and regulators under a crisis, when these savings and loans were going down and there wasn’t enough money in their insurance fund, we came up with
    ways to extend the period to give them a little bit longer to work out their problems.

    • I guess the Federal Home Loan Bank issued the so-called working capital certificates and let the entities hold [the certificates] as an asset to increase their capital.
    • If you pick up one of those certificates and look at the bottom, it said “Made at the Federal Reserve.” 
      • And if you look at the fine print, it said “Dreamt up by Ed Ettin.”
      • I will go to hell for that, I’m sure, but I thought we were only talking about a little bit longer: “Your Honor, I didn’t know, I was only following orders.” 

--  Edward C. Ettin

2006  0310 - FRB - Federal Reserve Board Oral History Project - Interview with Edward C. Ettin, Former Deputy Director, Division of Research and Statistics - 57p

  • MR. SMALL. While on the Hill, how much did pressure from, or interaction with, the banking industry on specific issues differ from when you were a Board member?
  • MR. OLSON. Well, let me tell you, a big difference. When Arthur Burns used to testify before the House Banking Committee, if you were, let’s say, a banker and you wanted to sit in the audience, you could stroll in as he was about to testify because the room would be maybe one-fourth full.
    • Ten years later, when Paul Volcker would testify, if you wanted to sit in and listen, you had to have somebody standing in the hallway for two hours in order for you or your group to get a seat.
    • That’s just a different level of intensity of how much banking issues became lobbied, in significant part because it was then, and to a significant part [is] today, a zero-sum game.
    • The Congress was essentially deciding which industry could offer which products. And because of that fact, there was a lot at stake.
      • The securities industry was on one side.
      • The banking industry was on one side.
      • The insurance industry was on another side.
      • And they each had major stakes.
        • So there was a lot of lobbying going on. And, over time, it got much more intense.

2014 0114 - FRB - Federal Reserve Board Oral History Project - Interview with Mark W. Olson, Former Member, Board of Governors of the Federal Reserve System - 55p

  • (p2-3) - MR. SMALL. Today we hear a lot about the difference in the mortgage industry between originating, processing, and generating fee income versus actually holding the mortgage and having some of your money in the mortgage.
  • MR. JACKSON. Right. That’s a major issue with the mortgage-backed security aspect of funding.
  • MR. SMALL. When you were starting out back then, were you holding mortgage loans?
  • MR. JACKSON. No. We would originate the mortgages on the homes or the building and then sell them by assignment without recourse to institutional long-term holders—life insurance companies, mutual savings banks, and so forth.
    • The life insurance companies, mutual savings banks, and, to a smaller degree, the savings and loan associations were the principal long-term holders of the paper.
      • In turn, our industry would be the servicer.
    • Our principal business was the servicing; it produced the most profit.
      • You created these loans in order to have the privilege of servicing them.
      • With long-term slightly rising interest rates over years and relatively low inflation, you can imagine that the mortgage servicing business, with a low default rate, was a relatively profitable business.
  • MR. SMALL. And by “selling without recourse,” that meant the insurance company knew that the money was theirs and everyone knew whose money was at stake.
  • MR. JACKSON. Everybody understood that. In those days, it was quite common for large institutional investors—the largest ones being the life insurance companies—to have, in a particular territory, exclusive correspondents through whom they made all of their mortgage investments. In my case, for example, I was the exclusive mortgage correspondent for the Aetna Life Insurance Company in the state of Alabama. As the exclusive correspondent for various
    institutional investors, you were interested in having relationships that provided you the funds with which to originate and ultimately sell those loans.
  • MR. SMALL. But the transparency of who owned what and who was liable—
  • MR. JACKSON. There was never any question that—
  • MR. SMALL. Unlike today.
  • MR. JACKSON. Yes.

2010 0311 - FRB - Federal Reserve Board Oral History Project - Interview with Philip C. Jackson, Jr., Former Member, Board of Governors of the Federal Reserve System - 44p

  • MR. SHERRILL. During the eight months, San Francisco National Bank had failed. San Francisco National Bank had what were called “brokered deposits.” Brokers had collected $10,000 deposits from a number of people, put them together in a $100,000 deposit, and put it in the San Francisco National Bank as a brokered deposit.
  • MR. SMALL. Those would have been FDIC insured?
  • MR. SHERRILL. At the time, the limit for insured deposits was $10,000, so only $10,000 of the $100,000 was insured. That was the problem. Kenneth Randall said, “It is one deposit, $10,000.”
  • MR. SMALL. Not 10 deposits?
  • MR. SHERRILL. The Comptroller of the Currency said, “It’s 10 deposits.” They had locked in on this issue so much so that the business of the FDIC had stopped. They couldn’t agree on anything. I was appointed to break the deadlock, only nobody told me that ahead of time. I didn’t discover the situation until I got there.
    • I had the swing vote. I didn’t make a quick decision. I studied the matter for almost three months. The arguments were very balanced, and it was hard to decide which side had a better view.
    • Finally, I went to Chairman Randall and said, “Are we an insurance company or are we a government agency?” He said, “We’re both. We’re agents of the government, but we do insurance.” I said, “If it came down to having to be one, which would we be?” He said, “I’d say we were an insurance agency.” I said, “It’s been my experience that insurance companies that do not pay their claims on technicalities do not prosper.” He thought for a minute and said, “I never thought about it that way. I’ll vote with it, but we’ll change the regulation to make it one deposit in the future right away.” I said, “I agree with that.”
  • (p) - MR. SMALL. The concept of calling it a credit default swap is simply because, legally, it couldn’t be called insurance. Credit default insurance is what it is. It has a couple of problems being without proper underwriting and without an insurable interest.
  • MR. SMALL. If it had been insurance, it would have been under different regulation and supervision?
  • MR. SHERRILL. It would be under regulation set by the states and, therefore, essentially unregulated.

2010 0329 - FRB - Federal Reserve Board Oral History Project - Interview with William W. Sherrill, Former Member, Board of Governors of the Federal Reserve System - 58p

  • MR. SMALL. During this time, Preston Martin was Vice Chairman and he had come from the thrift industry.
  • MR. ROBERTS. I think his claim to fame was the development of the secondary mortgage insurance market or private mortgage insurance.
  • MR. ROBERTS. Volcker was out of town when a call came in from the Ohio governor’s office. Catherine Mallardi (Volcker’s secretary) passed it on to Mike Bradfield. Bradfield took it and called me and Bill Taylor.
    • The governor’s assistant told Bradfield that the governor wanted to talk to Volcker because he wanted to make sure that there weren’t going to be more runs on state-insured institutions.
    • And he said that the governor was going to declare a “banking holiday.”
      • Everybody’s antennae went up because we hadn’t had a banking holiday since the 1930s, and we didn’t like to use that term.

2008 0131 - FRB - Federal Reserve Board Oral History Project - Interview with Steven M. Roberts, Former Deputy Director, Division of Banking Supervision and Regulation - 25p