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While Celeste, a Democrat, generally won high marks for his decisive and tireless handling of the crisis, some critics think that freezing the thrifts was the wrong move. "Ohio overreacted, turning a regional problem into a worldwide scare," says Leonard Santow, a Wall Street consultant. Many experts believe Celeste could have halted the panic by bailing out the thrifts immediately with cash borrowed from the Federal Reserve.
The crisis prompted depositors across the U.S. to wonder, maybe for the first time, just who insures their money. The large majority of deposit-taking institutions are federally insured--83% of S and Ls, for example. But 30 states, including Massachusetts, Texas and Illinois, permit at least some of their commercial banks, thrift institutions or credit unions to rely on private insurance funds.
Many Ohioans, including the Governor, admit that until now they never paid much attention to the fact that some thrifts were not insured by the U.S. Government. The privately insured S and Ls wear window decals that look as authoritative as the FSLIC symbols, but the thrifts are often not subject to the same degree of oversight as institutions that are insured by Uncle Sam. Some Ohio thrifts may not have sought Government protection because they wanted to avoid the paperwork and scrutiny that comes with U.S. insurance. Ducking the expense of complying with federal regulations may have helped institutions offer savers unusually high interest rates.
The Ohio experience could start a movement to force all banks and S and Ls in the U.S. to buy federal insurance. Says one congressional staffer: "Given the weakened condition of the thrift industry, another crisis is likely to happen unless there are changes made in the current system." Rhode Island Democrat Fernand St Germain, chairman of the House Banking Committee, has asked federal regulators to advise him on whether they believe private insurance is adequate.
St Germain sees the move toward financial deregulation in recent years as partly responsible for the new banking troubles. Before 1980, banks and S and Ls were subject to federal ceilings on the interest rates they could pay depositors. Now bankers have much more freedom to pay what they wish, and competition has pushed rates up. That in turn has led the S and Ls to make riskier investments to cover the handsome payouts. In the past, thrifts generally limited their loan business to home mortgages. Now many have plunged into higher-yielding but more dangerous ventures, ranging from office-building construction to securities deals with traders like E.S.M. "It's harder to make a profit," says Robert Seaton, president of Cleveland's Cardinal Federal Savings & Loan. "Therefore institutions are doing things they wouldn't have done before." Federal regulators hope to reverse the trend with tighter scrutiny and new limits on how fast a thrift can grow.