While everybody has been worrying that the Federal Deposit Insurance Corp. (FDIC), which insures bank deposits, will start down the rabbit hole that devoured the fund that insured savings and loans, the FDIC has been paying off uninsured deposits held by foreigners, some of them very sleazy foreigners, in an overseas branch of a minor-league and pretty sleazy insolvent American bank.
The busted bank was the National Bank of Washington, an unusual institution founded by the Mine Workers Union in the militant days of the CIO and controlled in 1990 by an exotic combination of Saudi operators and District of Columbia politicos.It was a small-to-middling bank with about $1.5 billion in alleged assets, many of them worth a lot less than their book value.
The National Bank of Washington had been a goner for at least six months before the regulators moved, and there's no serious question that it should simply have been shut down, its insured depositors paid off and the rest told to wait and see if there was anything left for them after the FDIC disposed of the assets.
The National Bank of Washington had a little foreign operation on the side: A bank in the Bahamas, with $37 million of deposits all necessarily uninsured, because the law does not permit the FDIC to insure deposits in foreign branches.
The Bahamas have very strong bank secrecy laws. One does not need much imagination to guess the likely identity of depositors in a Bahamian branch of a marginal, poorly run American bank.
Riggs National, which absorbed The National Bank of Washington with the help of a government subsidy, wanted no part of the Bahamian branch, and the FDIC staff urged that these depositors be cut out of the deal. Chairman L. William Seidman overruled his staff, and the FDIC paid Riggs to pay off the Bahamian depositors.
Kenneth Guenther, who runs the Independent Bankers Association of America, complained bitterly. His small-town banker members were being hit hard by an increase in their deposit insurance premiums because the FDIC was on a losing streak.
Guenther wrote the FDIC to inquire how the agency could justify taking money from country bankers' pockets to give to uninsured depositors in a Bahamian bank.
Instead, the answer by FDIC Director Paul Fritts pointed out that "approximately 51 percent" of the deposits in the nine largest American banks were in foreign branches.
"It was believed that negative repercussions would have been felt by these money center banks if the Nassau deposits were not included in the NBW transaction, because of the confusion in the international markets that would have been created by such a decision."
If sophisticated international money men cannot tell the difference between a National Bank of Washington and, say, a Chase Manhattan, then the world financial system is doomed. And if in truth there is no difference between them, then the American financial system is beyond rescue by the FDIC.