Click here for Full Issue of EIR Volume 13, Number 21, May 23, 1986

�TIillEconomics

What Volcker really meant by

Back in 1978, soon-to-be Federal Reserve chainnan Paul simply crush political opposition to whatever "solutions" the
Volcker endorsed the concept of "controlled disintegration" megabanks decide to employ.
as "a legitimate objective for the 1980s," in a speech before Volcker's usual channel for leaks, Salomon Brothers'
Warwick University in England.In the light of recent events, Henry Kaufman, indicated what sort of financial environ­
an ordinary fellow might suspect that he was doing it on ment these people expect, in a May 6 talk before the National
purpose: Press Club:
First, the Donald Regan cabal in the White House per­ "... Strong bond perfonnance has been weaned on
suaded President Reagan that he need take no action against lackluster economic growth .... This market behavior also
the impact of collapsing oil prices on the U.S. economy, suggests an unquantifiable speculative participation in the
despite the mortal danger to the entire Southwestern banking rally, which has undoubtedly helped to boost prices and to
system. . lower interest rates beyond levels that might have prevailed
Secondly, Regan and Co.persuaded the President to rub­ without such speculation.Wic;le daily price swings reflect the
ber-stamp the April 11 dictates of the International Monetary volume of this speCUlative activity. Consider the explosion
Fund, at the May 2 Tokyo Summit, leaving the IMF as in trading activity in some key sectors. The average daily
recognized referee in an international system based on mul­ volume of trading in the Treasury bond future was $23 billion
tilateral cheating. in the first four months of 1986.In the comparable periods in
Third, Regan convinced the President to endorse tax leg­ 1985 and 1984, this daily volume averaged only $15 billion
islation which penalizes precisely those sectors of the econ­ and $10 billion, respectively .... The capacity-to leverage
omy which threaten to bring down most of the international in the financial markets is far greater today than at any time
banking system. in the past 50 years.The pleasant side of speculation is that
Finally, Federal Reserve chainnan Paul Volcker May 13 it can reinforce a bullish trend. The dark side is that the
demanded emergency powers to arrange shotgun takeovers unwinding of speculation contributes to quick, and dramatic,
of failing regional banks. The undertaker, it appears, has market reversals."
taken extraordinary measures to increase the supply of corps­ With this in mind, the Senate Banking Committee, in a
es. The major money-center banks are taking advantage of special session May 13, heard the pleadings of Paul Volcker
the relatively faster disintegration of domestic real estate, and other federal regulators, seeking emergency powers to
energy, and farm debt, compared to the disintegration of their save failing financial institutions by means of bank takeovers.
own holdings of Third World paper, to stage a takeover of The hearings occurred as two more agriculture-based banks
the regional banking system. If they succeed, the United • collapsed in Idaho, bringing the number of farm-bank fail­
States will look like Britain or Canada, where a handful of ures this year to 42.The emergency powers which Volcker
megabanks have monopoly power over the financial system. sought in the Senate are centered on a scheme to allow take­
This will not avert a crisis: The far-worse position of the overs of failing banks by out-of-state financial institutions­
megabanks will come to the surface in short order. It will primarily Citibank and Chase Manhattan. Volcker stated,

4 Economics ElK May 23, 1986

© 1986 EIR News Service Inc. All Rights Reserved. Reproduction in whole or in part without permission strictly prohibited.
 I
"Banks heavily dependent on agriculture and energy have After that, capital gains would be Itaxed at the ordinary in-
been hit particularly hard and bank failures could damage the come rates, which would be 15% a,d 27%.Regan, Volcker,
... entire economies of states and regions." He then added, "The et al. have called a general profit-taking.
failure of a few important institutions could raise . . . concern
about others, basically sound banks, and lead to a contagious What's next for the banking system?
and spreading loss of confidence." Despite the recent advance in oil prices, from the $ 1 1- 12
At the same hearing, Comptroller of the Currency Robert level to the $ 14- 15 level, there is little hope of a price in­
Clarke stated for the record: "There are currently 300 national crease, for the simple reason that we are continuing our slide
banks on the problem list, up almost 300% from 1983." into depression. Gasoline demand actually fell in the United
States between March and April, despite lower prices. In
The tax falls London May 15, the directors of Shell Oil warned stockhold­
At least 6 of the 10 largest Texas banks are represented ers at the company's annual meeting that oil prices would
in the Comptroller's list of 300. We reported previously that continue downward from the $ 15 level, further reducing oil
the Texas big 10 are less endangered by their energy loans, company revenues.
which amount to roughly 150% of shareholders' capital, than The stricken oil-producing regions of the country are
by their real-estate loans, which amount to about 500% of producing little else than a wave of business failures. Tulsa's
shareholders' capital. The washout of the Southwestern real­ Bank of Commerce failed May 8 after panicky depositors
estate boom had already brought the proportion of delinquent withdrew $5 million the previous day. Bank of Commerce's
loans to the level of those banks' capital, i.e., threatening failure marked the second depositOrs' run against an Okla­
their solvency. That was before the oil price collapsed. homa bank, and this year's fourth failure. On May I, the
In January, EIR warned that tax reform proposals for­ First National Bank of Carter became .the year's third banking
mulated by the House of Representatives could knock down failure.
the value of most commercial real estate by a solid 40%, Oklahoma banks have lost an eStimated $200 million in
since the pricing of such properties depends heavily on tax capital during the past two years, even before the crashing
advantages. The Packwood legislation in the Senate, sup­ oil price put their energy loan-paper through the shredder.
ported by the White House, is actually worse than the worst­ The state's three largest banks are all posting losses for the
case scenario we examined at the time. It is a prescription for first quarter of this year-even before the full impact of the
a real-estate market crash. Not that such a crash is not long oil price crash hit. Bank of Mid-America, the state's largest,
overdue, and perhaps even beneficial under the right circum­ showed a $5.9 million loss; BancOklahoma showed a $44
stances. But under present conditions, Packwood is in the million loss; and First Oklahoma Bancorp projects a loss of
position of the firemen in the old British wheezer,Pure Hell up to $67 million.
at St. Trinians, who mistakenly attach their hoses to a gaso­ These are banks that have already had to scramble for
line truck. cash, borrowing funds from out-of-state banks under tough
Both commercial and residential properties can now be conditions. First OklaIioma's capital:has already fallen below
written off in 19 years; the new legislation stretches this out the minimum agreed to with its creditors, who may now force
to 27.5 years for residential properties and 3 1.5 years for the bank into a distress sellout.
commercial property. Depreciation would also be subject to
the alternative minimum tax. Even investors who take a more New York buyout
active role would be limited in the amount of losses that could In desperation, the Oklahoma State Legislature is in the
be claimed. Landlords could use up to only $25,000 in losses process of passing a bill permitting dut-of-state banks to take
to offset other income. That wipes out the unlimited deduc­ over failing Oklahoma institutions.' The bill, supported by
tion for interest expenses, which was the secret of successful the state bankers' association, passed on May 7. In effect,
real-estate speculation under the 198 1 tax bill. the Wall Street mafia headed by White House chief of staff
The designers of the tax legislation are not merely aiming Donald Regan, the former head of Merrill Lynch, will start
at the real-estate bubble, but at the speculative bubble in all buying out regional institutions at garage-sale prices. Texas
markets. Paul Volcker's recent jeremiads conceming the $8.5 is the next target, where crashing oil prices and a dissolving
trillion in domestic debt he is responsible for creating were a real-estate market endanger the state's $200 billion in bank­
crude hint to this effect. As a whole, the tax package proposes ing assets.
a $22 billion tax increase, a classic deflationary measure, for Texas suffered another billion-dollar failure earlier this
fiscal-year 1987, due to the time gap between the elimination month, when Houston's Mainland Savings was shut down
of tax deductions, and the phasing-in of a lower general tax by regulators, and several more are expected during the next
rate. several weeks. The fallout from the Southwest banking col­
Because of the elimination of the special 20% tax on lapse has already produced a conttaction in bank lending
capital gains, many stockholders will sell investments before nationally, as of the first quarter of 1986. That is the first time
July 1, 1987, to take advantage of the lower current rate. bank lending has contracted since the Great Depression.

EIR May 23, 1986 Economics 5