Truman Talley Books/Dutton 1997 (468
It takes guts to write two books with the same title, but that's
what Brookings-affiliated financial journalist Martin Mayer has
done. The 1974 version, a small portion of which is recycled in
this volume, presented an industry on the verge of great technological
and structural change. The 1997 book also presents an industry on
the verge of tremendous change, but the details make it clear that
today's banking industry has very little to do with the industry
Mayer wrote about in 1974.
Except, that is, in the area of check processing. Mayer's 1974
book traced a check he wrote through delivery trucks, optical scanners,
sorting rooms, and back to his mailbox. Retracing that same path
today, Mayer finds that it is essentially unchanged except that
most of the financial institutions involved have been bought out
or merged into larger entitites. And although this is a Very Big
Book covering every banking topic from money as a store of value
to the adventures of derivatives trading, this country's check processing
system raises its head in chapter after chapter, allowing Mayer
to demonstrate many of the problems and challenges for America's
To begin with, Mayer tells us, checks are a terribly inefficient
means of paying the bills. Picture chartered airplanes zipping all
over the country carrying nothing but little slips of paper and
you'll get the picture, because that's exactly what happens every
night under the Fed's processing system. Then consider that the
paycheck a California university employee receives is drawn on a
bank in North Carolina, allowing the university to take maximum
advantage of the "float" that occurs while the check is
sent from coast to coast. Finally, remember that checks can bounce,
unlike a smart card payment, in which the payment begins as a deduction
from the payor's account instead of ending that way.
But it's almost the twenty-first century, and surely checks are
to soon be replaced by electronic transfers, right? Perhaps, but
not nearly as quickly as you might think. Because a large number
of Fed employees are involved in check processing, the Fed has a
vested interest in seeing the current system continue, inefficient
as it may be. So the Fed is investing heavily in machinery to sort
all that paper faster. And Americans seem to be cooperating, writing
234 checks a year per capita, compared to only 86 in France, the
runner up in check writing.
According to Mayer, the Fed's approach to the rest of banking isn't
very enlightened either. With respect to the Fed's efforts to control
the economy through tightening and loosening access to dollars,
he points out that on a single day in 1994, foreign-based banks
traded six hundred times as many dollars as the Fed is likely to
employ for domestic monetary intervention. Those Eurodollars are
only a phone call (or a wire transaction) away for banks dissatisfied
with Fed policies. When it comes to electronic banking, the regulators
don't seem to know what to do, either. Mayer reminds us that it
was the Fed's refusal to process credit card slips that caused private
enterprise to develop the point-of-sale "swipe" devices
that approve your credit card at retailers everywhere today.
Mayer's scorn for the inability to grasp the future is not reserved
for government regulators. He points out on several occasions how
long it took banks to realize that the now ubiquitous ATM machine
is really a cost-saving device, replacing proliferating branch offices
and expensive teller transactions. (He also notes that banks are
beginning to forget what they finally learned, turning again to
high per-transaction ATM fees.) Then there's poor IBM, who refused
to help Bank of America create computing machinery for banks because
its market research people, "who had also decided at about
the same time that there wouldn't be any large number of customers
for the strange electrostatic process Xerox had patented,"
declared that most banks would never want to balance their books
at the end of the day with a computer.
None of this is to say that Mayer is an unusually strident or unfair
writer. He offers logical support for even his strongest criticisms
of regulators and bankers without vision. But he does have an annoying
habit of giving the reader distracting and irrelevant descriptions
of the industry players he mentions. Thus, Bill Ford is "a
sarcastic, very western former chief economist for Wells Fargo in
San Francisco." Jill Considine, who runs the New York Clearing
House, is "a serious blonde in a tailored suit who has retained
her Irish apple cheeks." Gerald Mercer, who runs U.S. Check,
an air courier operation, is "a compact, handsome forty-plus
former stunt pilot gone commercial." And Clifford Rosenthal,
head of the National Federation of Community Development Credit
Unions, is "an overweight middle-aged former political activist
with curly hair." Dress for success when you meet Martin Mayer--he
As these personal descriptions indicate, Mayer's is an "insider's"
book, meaning that outsiders are likely to think (a) that they are
reading here what they can't learn elsewhere, and (b) that Mayer
is a real insider. To some extent, both are true, but the content
of most of the "insider" stories lacks the punch and gossipy
flavor that some readers may seek. Instead, Mayer gives us one after
another of his mildly entertaining, sometimes insightful "I
remember sitting next to so-and-so at a meeting in New York"
stories. (A highlight is his discussion of a 1966 article by Alan
Greenspan in Ayn Rand's journal The Objectivist which argued that
statists hate the gold standard because it prevents them from confiscating
savings through inflation.) These anecdotes do make the book more
readable, especially in the dense and dangerous middle chapters
about commodities trading and the derivatives fiascos. Unfortunately,
those chapters also reveal another flaw in the book --a tendency
to explain very simple concepts like a "run on the bank"
while assuming that the reader has already mastered very complex
concepts regarding payments systems and commodities markets.
Never tiring in his effort to tell us everything there is to know
about banking (or at least everything he knows about banking, which
may amount to the same thing), Mayer gives us several chapters at
the end about banking regulation and its prospects for the future.
He does a masterful job of explaining the complex interrelationships
of the Federal Reserve, the Federal Deposit Insurance Corporation,
and the Office of the Comptroller of the Currency, and he attempts
to show the effects of regulators for both good and ill with a chapter
on the savings and loan crisis. One of the best quotes in the book
from an outside source refers to the collapse of California's American
Diversified Savings & Loan: "A company with $11 million
in assets lost $800 million. With perhaps $500,000 in equity, it
destroyed $800 million of insured deposits. . . . This anecdote
is tantamount to a news report that a drunken motorist has wiped
out the entire city of Pittsburgh."
Although it's disappointing that he essentially blames the whole
S&L crisis on the regulators without examining the changes to
the tax treatment of real estate in the 1986 tax reform, Mayer's
central insight is rock solid. Extreme deregulation without corresponding
adjustments to deposit insurance won't work. As Mayer explains it,
"[i]f the government guarantees deposits in an institution
where the owners no longer have their own money at risk, the owners
will solicit money aggressively from the public, paying whatever
interest rates may be necessary for that purpose, and take the cash
to the gambling casino. If the little ball falls in number 17, they
are rich; if it doesn't, the government pays."
From S&Ls, Mayer moves on to one of the hottest regulatory
debates around--whether banks should value their assets that have
lost value at actual market value or at historic cost. If you're
unfamiliar with this debate, Mayer's is an excellent overview. From
there, he takes us on a tour of some very significant demographic
facts that may surprise some readers. Believe it or not, some 25%
of U.S. households have no bank accounts. Storefront check-cashing
shops have grown from 2,150 locations in 1985 to 6,000 ten years
later, cashing 200 million checks worth more than $60 billion dollars
in 1995. The practical consequences? "At a time when rich folks
can send money through the ATM network to their kids in college
for a price of one dollar (or nothing), poor people have to pay
ten to twenty times as much. Mexicans, Guatemalans, Salvadorans
and immigrants from the Caribbean pay even more to send money home.
For no reason." Whether banks can, or even want, to win back
a portion of this market is an open question.
For all of Mayer's fascination with smart cards, electronic payments
systems, derivatives and securitization, it's nice to see that he's
really a small-town banker at heart. He clearly prefers lending
the old fashioned way, where the loan officer knew his community,
his customers and their families, and where "character"
loans were still an important part of banking relationships. The
concept of automated scoring of small business loan applications,
he says, just won't work in the end. But whether banks can manage
to preserve their traditional role in this respect is highly uncertain.
A recurring theme throughout the book is that banks are in some
danger of running out of reasons to be in business. As electronic
processing giants take over payments systems, as smart cards and
digital cash issued by non-banks replace even cash-driven ATMs,
and as more and more commercial banking alternatives appear, banks
just might become "a little bit of application code in a smart
network," as one of Mayer's sources put it.
* John Pickering is an associate with the law firm of Balch &
Bingham in Birmingham, Alabama.