John Pickering*

Truman Talley Books/Dutton 1997 (468 pages)

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 bankers.

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 notices.

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.