(FORTUNE Magazine) – THE BIG WINNER in Washington's debate over the future of the savings and loan industry is a shrewd survivor, a man who has held top jobs from accounting to academe, from corporate business to the federal bureaucracy. L. William Seidman, 68, was named chairman of the Federal Deposit Insurance Corp. in 1985, at an age when many people are retiring. Nearly two years ago he directed the FDIC to analyze the crisis in the deposit insurance system. Much of his study was incorporated in the Bush Administration's plan to borrow $50 billion to help close or consolidate 350 insolvent S&Ls and to pay off their depositors. Seidman (pronounced SEED-man), who says this process could take ten years, is now set to become head of a far more powerful FDIC that will insure all S&L deposits. He began his career at Seidman & Seidman, the accounting firm his father helped found. After serving as chairman from 1968 to 1974, he worked as an economic assistant to President Ford, a fellow football player from Grand Rapids. Seidman left with the Ford Administration in 1977 to become a senior executive -- and later vice chairman -- of Phelps Dodge. In 1982 he was named dean of the business school at Arizona State University. Over sandwiches in his Washington office, Seidman talked with associate editor Gary Hector about the surging costs of the S&L bailouts, the FDIC's role in shutting down poorly run institutions, and his concern that a recession may have begun.

''This is essentially a dirty business -- one of telling people to stop doing bad things, telling people we will put them out of business. Under the President's plan for the S&L industry, we at the FDIC will get additional burdens, particularly running the S&L insurance fund. We face a tremendous challenge over the next year or two. No one can estimate how much the S&L industry's problems will cost. Much of the cost will be determined by future economic conditions -- interest rates, real estate values, and so forth. The most recent numbers put out by the Administration predict that over the next ten years, the President's plan will cost $157 billion. ((In addition to borrowing $50 billion, the government will increase the insurance fees that S&Ls have to pay and sell the assets of troubled thrifts to raise cash.)) It is clear to us now, going into these institutions as we have, that the estimates are low. We'll be a lucky nation if we can dispose of the current backlog of insolvent S&Ls in ten years. The bulk of the problems ought to be cleaned up within five years -- if we don't have another avalanche of insolvencies. But as interest rates go up, so will the number of institutions that fail. Since the President's plan was announced, we have taken over about 220 institutions. They'll all have to be dealt with: closed, sold, or consolidated. The government's first objective is to generate enough money to cover the insured deposits. Second, the government wants to get the assets back into the private sector as quickly as it can without disrupting markets. We won't hold a fire sale, we won't dump assets. We'll sell them at a fair market value, based on independent appraisals. We objected to one feature of the Southwest Plan ((a rescue operation for troubled thrifts in Texas put together by the main S&L regulator, the Federal Home Loan Bank Board)), specifically that the Bank Board constructed sales in such a way that an S&L's troubled real estate would be held off the market for seven to ten years. The Bank Board gave anyone who bought an S&L a guaranteed profit margin if the buyer simply held on to the real estate. The deals not only eliminated interest rate risk but also gave the buyer protection against a decline in the quality of the assets. We don't think that helps the marketplace. A large number of the institutions sold by the Bank Board may end up back in our laps, and we'll need to find investors to put in more capital. A great many are undercapitalized.

I think it is appropriate that the government review the contracts signed by the Bank Board late last year. Under the President's bill, this duty will be assigned to the Resolution Trust Corp. (RTC), a new, separate agency that will become the final resting place for S&Ls that don't make it. I think the RTC should review the Bank Board's contracts to see whether they are legally binding and were appropriately handled. A lot of people think the FDIC will liquidate the S&Ls we take over. We will not. On the day President Bush signs the bill approving the S&L plan, we will give the Resolution Trust Corp. all the S&Ls we've taken over. The RTC will be a tremendous organization. It will deal with institutions that have somewhere between $300 billion and $500 billion in assets, including over $100 billion in real estate to dispose of. It will be a financial institution with deposits more than double those of Citibank, and one that has many more branches and places of business. And it will have to sell or liquidate S&Ls with some $400 billion of deposits. The FDIC, in its whole history, has handled bank failures or bailouts involving $144 billion of deposits. If all goes as planned, the RTC will be the nation's largest financial institution by quite a bit. Under the President's bill it will be chartered for five years. But it will be a near miracle if it finishes its work by then. We have not yet determined how the liquidation will be done. The President's plan simply says the RTC's board of directors will appoint a manager. Whomever the RTC selects will have to employ some of the staff from the old Federal Home Loan Bank insurance operation. He'll have to get assistance from us, and he will need to hire people from the private sector. Besides supervising 350 insolvent thrifts, the RTC will monitor about 100 institutions already sold by the government and could take over as many as 250 undercapitalized, but still solvent, S&Ls. There will be 500 or 600, maybe even 700, institutions involved, each one of which is very complicated. I think capital is the real issue for the future of the S&L industry. Without sufficient capital, an S&L cannot operate in a safe and sound manner. Our position is that S&Ls ought to have the same requirements as banks: capital equivalent to 6% of their assets, vs. the 3% they currently have. They should have tangible capital, not phony accounting capital, such as goodwill or deferred loan losses. Banks don't count goodwill or deferred loan losses as part of capital. S&Ls shouldn't be permitted to either. Banks have been counting bad debt reserves, but we hope to forbid that in the future for both banks and S&Ls. There is no question that the Federal Savings and Loan Insurance Corp. could have stopped a good part of the losses in the S&L industry. FSLIC got into trouble because it was not independent. It was part of the Federal Home Loan Bank Board, and the board's primary mission was to see that inexpensive financing was available to promote housing. That objective is in almost direct conflict with the main goal of an insurer, which is to keep the insurance fund sound. The budgets of FSLIC and the Bank Board were controlled by the Office of Management and Budget. When Ed Gray, then chairman of the Bank Board, asked for more staff in 1984 to supervise the growing number of troubled thrifts, David Stockman, then head of the OMB, wouldn't talk to him. You had a situation where an OMB functionary could say to the Bank Board, 'Cut back on your supervisors.' Underlying the current debate on S&Ls is the question of what the structure of the financial system is going to be. We are heading toward a system in which we will let banks and S&Ls take less and less risk with insured deposits; we will narrow their role. For example, the S&L industry is now talking about requiring thrifts to put 80% of all assets into home mortgages and other assets related to housing, such as mortgage-backed securities. That's up from 60% now.

How can we keep these so-called narrower banks competitive when foreign banks, securities firms, and other competitors can sell insurance and real estate and be mortgage bankers and all the rest? While we think the government must limit what can be done with insured deposits, we also believe that banks and S&Ls must be given the power to engage in activities outside the narrow, insured bank. Our banks are losing market share, particularly in world markets, but also to less regulated companies in the U.S. We are ready to let states authorize any kind of legal activity for banks as long as the insured deposits are protected. That can be done by allowing these activities to take place in subsidiaries and by building 'fire walls' -- legal barriers -- to protect the bank or S&L from reverses by the subsidiaries. The day is also coming when anybody will be able to own a bank. The wall that keeps commercial entities, like GM, from owning banks already looks like Swiss cheese. For example, S&Ls have been purchased by companies like Ford. I don't think it makes much sense to maintain the separation of commerce and finance. But the Federal Reserve system, which regulates holding companies, believes that separating commerce and finance is the 11th commandment. And bankers like it because they are the only executives in the country safe from waking up one morning to find Mr. Icahn and TWA at the door with a bid for their bank. But I'm convinced that in the future not even the Fed or the bankers will be able to offset the push toward a system of universal banking, such as exists in Germany or Switzerland. A more immediate concern now is the state of the economy. My view, looking at the numbers, is that a recession has probably begun. I wouldn't say that for sure until we look at another month's figures, so let's call it a slowdown. Some of the key indicators -- led by automobiles -- show that a slowdown is under way. As an insurer, this causes me some concern. I think overall debt levels are high. We've never experienced a recession with this level of debt, so we'll all have much to learn. So far there is nothing to indicate that the slowdown will be severe. The FDIC's insurance fund is adequate to meet anything we can see on the horizon, including what you might call a normal recession. But we are still uncomfortable with the size of the insurance fund. It is below where it ought to be, and we had hoped to have some time to rebuild it. If the recession is long and deep, it could present a serious problem.''

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: THE SHAPE OF THE INSURERS FAILURES AND BAILOUTS INSURANCE FUND The FDIC closed or rescued over 200 of the nation's 14,000 banks in 1988. The FSLIC closed or assisted just 100 of the 3,000 S&Ls, but its insurance fund is hemorrhaging.