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Lead Editorial Opinion

March 22, 1998

To see the March 23, 1999 editorial, click here

Federal Malpractice

Bank Examiners Out of Control

As long as deposit insurance exists, it is necessary to have close regulation of banks to diminish the potential risk to taxpayers. But the behavior of Federal Deposit Insurance Corp. in a southwest Missouri case is less than reassuring.

The bank examiners probably never saw the likes of farmer and banker Glen Garrett, who lends money on a handshake and even physically built his own bank building, using his own labor, his own hired hands and his own equipment. That was one of the things that drew in the regulators. They wanted to see the bids and contracts for the building. There weren't any.

Garrett's operation, the First State Bank of Purdy, has been scrutinized in no less than four separate examinations, and while regulators found that he some- times handled things too casually, they uncovered no losses of tax-payer-backed deposits.

The U.S. attorney declined to follow up on a criminal referral, and a former FDIC official - now serving as an expert witness in the case - believes the agency has hounded Garrett long enough. Moreover, Garrett's lawyer [Stephens B. Woodrough] says the value of the bank building Garrett built turned out to be $300,000 more than what it cost to build it - meaning Garrett's hands-on informality saved money.

But the FDIC, no doubt frustrated by its inability to uncover some great crime, refuses to let the matter die. Six loans were seen as questionable. All were paid back with interest, but Garrett was given the choice of paying a $25,000 fine and signing a document implying wrongdoing, or fighting it out. He chose the latter. So far he's spent more than $1 million.

In an example of infuriating bureaucratic illogic, an FDIC spokesman says it makes no difference whether or not Garrett's methods incurred losses. Garrett admits he didn't do things by the book, but the FDIC's stance makes little sense. It ought to make great deal of difference whether losses were incurred.

When Congress enacted the S&L bailout program in the late 1980s and approved certain reforms in the system of banking regulation, it was expressing a great deal of faith in the regulators' ability to maintain the safety and soundness of the banking system. If nothing else, the FDIC's performance in the Garrett case suggests how easily the agency can lose all sense of perspective. This is how it chooses to deploy scarce resources?

How much money have taxpayers lost in a protracted exercise to soothe examiners' wounded pride?


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Last revised: June 1, 2012.