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Book, Software and Website Reviews

History of the Eighties, Lessons for the Future,Vol. 1
Federal Deposits Insurance Corporation, 1997, 572 pp.
American Finance for the Twenty-first Century
Robert E. Litan, United States Department of Treasury, Nov. 7, 1997, 162 pp.
Asset Securitization—Liquidity and Funds Management, Controller’s Handbook.
Washington, D.C. Nov. 1997, 90 pp.

The purpose of this review is to alert the reader to the recent publication of three separate
reports by Federal Agencies. All of the reports are potential additions to a reading list in a
financial institutions course.

The thesis of the FDIC Report, Histories for the Eighties, Lessons for the Future, is that
bank failures in the 1980s did not have a short list of causes. Rather they resulted from the
concurrence of a number of forces-economic, financial, legislative, supervisory, and mana-
gerial-which working together produced a decade of bank crisis.

The first section of the report provided a review if the challenges to the banking industry
created by the operating environment in the 1970s. The legislative mandates of the 1980s and
1990s are summarized with special attention paid to the impact these changes had on bank
failures. The section concludes with a discussion of the interagency conflicts between FDIC
and OCC. In the second section of the study, sectoral and regional crises are considered. The
topics covered include: LDC debt, mutual savings banks, the “too big to fail” issue, and the
cause of various regional bank crises.

The third section of the study discusses the common elements in the economic environ-
ment that characterized the various bank crises and the set of bank behaviors that
amplified their impact. The section concludes with an interesting section on fraud and
financial misconduct followed by a brief statement on the difficulty the regulatory
community has in separating managerial deficiencies and the slack internal control
system from fraud.

The final section deals with the behavior and performance of the supervisory agencies
during this period and the legal and regulatory constraints they operate under. The thrust of
this discussion is to present the thesis that the supervisory function was handicapped by a
philosophy that stresses identifying unacceptable levels of risk as observed on the financial
reports of the banks. The study suggests that the more appropriate policy would have been
to take a proactive view if risk that stressed policies that would help identify and contain risk

Financial Services Review 7 (1998) 317–319

1057-0810/98/$ – see front matter © 1999 Elsevier Science Inc. All rights reserved.
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as it developed. In a review of the role of the FSLIC was limited in how it could respond to
industry problems by severe budget constraints caused by the differentially poor funding it
received relative to other Federal Regulatory Agencies. A review if OCC examiners
reports for the period indicates that examiners repeatedly reported problems with the
internal control systems over lending operations but they were ignored until the late
eighties.

It is interesting to note that academic literature has devoted considerable time reflecting on
the adverse incentive system created by the flat-rate deposit insurance premiums; an element
in the discussion that is not given much creditability by this study. In preparing this report
the FDIC has been successful in creating a readable commentary on forces that influenced
bank failures in the decade of the eighties.

The stated purpose of American Finance for the Twenty-first Century is to discuss the
changes in the financial service industry through 2010, and to review the adequacy of
existing statutes and regulations. The general thrust of the report is to provide an all
encompassing review of the forces influencing the financial system (without covering any
topic in depth). This makes the report excellent reading for an undergraduate issues oriented
course. One of the pluses to the report are the brief historical summaries of policy issues. The
assertion, which I regard as essentially correct, is that today’s policy initiatives and regula-
tions are oriented toward preventing a second Great Depression. What is needed is a
paradigm shift that builds a policy that seeks to contain failure within boundaries and
recognize that markets reward players that embrace change. The report also argues that the
financial markets are becoming more complex, and that legislative and regulatory activities
that seek to divide the financial world into discrete segments is doomed to failure. This policy
should be oriented toward identifying, isolating and disposing of trouble spots that endanger
the stability of the whole system.

The report is built around five distinct themes. The study opens with a snapshot view of
the financial services industry and its function. The discussion is then broadened to
include globalization and a variety of changes in the information system. These forces
of change, it is argued, have unleashed a new round of competition that requires a change
in the orientation and thrust of our anti-trust efforts. The new policy must monitor the
“gatekeepers and keyholders” that control networks and technology. The goal of such a
policy should be to prevent a financial meltdown. The concluding section of the study
deals with the broad social theme that we need to work to open the financial system to
all Americans.

The OCC Asset Securitization—Liquidity and Funds Management, Controller’s Hand-
book is divided into three chapters, two of which provide an excellent overview of the
structure of the securitization transaction, the mechanics of cash flow, and the risks associ-
ated with the securitization activities. Although the discussion on the structure of
securitization can be found in a variety of sources, the detail and simplicity with which
the process is covered and the example provided—the credit card securitization pro-
cess—make the discussion a winner for an undergraduate presentation. The discussion of
the risk associated with the securitization is simple and much more complete than that
found in alternative sources. The third chapter is not of general interest but rather
provides a discussion of the examination objectives as they relate to the securitization

318 Book review / Financial Services Review 7 (1998) 317–319



process. Other Comptroller’s handbooks of possible interest include, capital and divi-
dends and mortgage banking.

Austin H. Spencer
Professor of Economics and Finance, Western Carolina University,

School of Business, Economics & Finance,
Cullowhee, NC 28723-9034, USA

E-mail address:aspence@wcu.edu

319Book review / Financial Services Review 7 (1998) 317–319