Increasing regulators' scrutiny of prospective bankers is not the solution to the rash of financial institution failures in Orange County, according to industry officials and consultants.
Despite the failure of seven banks and six savings and loans in Orange County and hundreds more nationwide since 1982, experts agree that the system is working, and they propose no radical revisions for the review process.
"There is always going to be some room within the system for sour apples to make their way into the barrel," said Alan Whitney, spokesman for the Federal Deposit Insurance Corp. in Washington.
He and others in the banking industry said that although the number of failures is unusually high in Orange County, most bankers are honest, and, nationwide, only about 1% of banks fail.
Whitney said the only alternative to the present system of reviewing applications for charters and federal insurance would be a nationalized banking system in which the government controls all the institutions and employees. But, he said, even that would not be foolproof.
Limitations of a Review
Others said that not even the most intense review can weed out people who plan to break the rules after they get permission to open the doors. And, one analyst pointed out that even honest people create problems that end up in disaster.
"Failures have come as the result of poor management in most cases," said Ernest Leff, a Los Angeles attorney who advises financial institutions. "Cases involving fraud are extremely rare, and the allegations are difficult to prove."
Anyone proposing to open a new California-chartered S&L must withstand a tough review, according to Shirley Thayer, counsel to the state Department of Savings and Loan.
Proposed directors must not only meet a $3-million minimum capital requirement, but they must provide detailed information about their personal lives and present their fingerprints for review by the FBI. Every officer or director must detail every aspect of his or her personal finances and present a comprehensive business plan, Thayer said.
The applicants must list pending litigation, and the state may request copies of court files. And, at some point, each prospective board member must testify at a public hearing about his or her qualifications. A completed application is usually an inch and a half thick, Thayer said.
Red flags go up if a person has been convicted of a crime or filed for bankruptcy. Either problem will most likely result in an application being denied, Thayer said.
Objective, Not Subjective Review
"The things we look for are objective, not subjective measures," Thayer said. "It's difficult to know if an individual will interpret the law and do things that are contrary to the public interest."
Thayer said she once investigated an Orange County applicant who was subsequently convicted on grand theft charges. The man turned over $38,000 of the $100,000 he collected from investors in a proposed S&L and kept the rest. He also failed to reveal that he was in the middle of a personal bankruptcy, Thayer said. She declined to provide details because the group has since withdrawn its application.
A spokesman for the Federal Savings and Loan Insurance Corp., which provides up to $100,000 in insurance coverage for each account, said FSLIC's review of officers and directors is very similar to California's.
Since 1984, the FSLIC has beefed up its review process and hired additional staff. It began accessing nationwide computer databases such as Nexus and Lexus to find news articles and court cases that may involve applicants. The agency also gets credit rating reports, calls for personal references on all applicants and, like the state, does checks for criminal records.
The California State Banking Department and the Federal Deposit Insurance Corp. have standards and procedures similar to the savings and loan regulators for approving requests for new bank charters.