Vol. 2000-5

   Perception is Nine-Tenths of the Law

My guess is that most readers pay only casual attention to the titles of these reports, while the few that do think about them probably concluded that I intended to use the word “Possession,” but inadvertently used the wrong word. All of us are familiar with the well-worn expression that “Possession is nine-tenths of the law” (or “nine points of the law,” as it first appeared in 1833, according to the OED), and know that it has something to do with the ownership of real estate. In this instance, however, my choice of the word “Perception” was deliberate and has nothing to do with property. I have my wife to thank for the idea.

  Recently I was telling her of a conversation with a good friend – an old Washington hand – and mentioned that we had spent some time discussing a statement one hears so often in this city: “In Washington, perception is reality.” My friend and I agreed that it was something more than a Mark Russell quip; that it has substance. This led us in turn to think of some of the many examples of what we had in mind, and finally to conclude that the subject might make an interesting report for readers. But what to call it? That evening, describing the conversation to my wife, I said something to the effect that just as “possession is said to be nine-tenths of the law,” so, too, perception in Washington is more important than is often realized. Her comment was that Washington, after all, is a place where laws are enacted and, therefore, why not make the title: "Perception is Nine-Tenths of the Law.” And I have.

  Perception is generally understood to be what Webster's Unabridged says it is: “The act or faculty of apprehending by means of the senses or of the mind" or, put in one word, "awareness." Here of course I mean something much different. For when the same perception -- the same awareness -- is shared by a great many people, it often becomes something that can be dealt with as if it were real. Legislators may decide to enact laws about it, funds may be appropriated to develop or abolish whatever people believe exists, and careers may be furthered or destroyed depending how one reacts to the supposed “reality.” For example, in 1989 Congress (in FIRREA) provided that the FDIC’s Deposit Insurance Fund should be at least 1.25 percent of insured deposits, and yet it is not clear that the Fund really exists (see below, Section II).

  In fairness to those who live and work inside the beltway (i.e., in Washington), it should be emphasized that confusion between perception and reality is not something with which only they are afflicted. It is found in many places in society, and in many forms. It is just that in Washington the consequences are likely to be more important, and the absurdities more obvious.

  What follows, therefore, is a collection of "perceptions" that have found banking and finance to be a particularly lush breeding ground. I have selected a few of these for comment, but not for detailed scrutiny. I am interested here only in the ways in which Washington goes about fashioning its own special world -- creating reality where none was thought to exist.

  I begin below with one of my favorites: “capital” or, more precisely, “bank capital.” This is a subject I have discussed in these reports on a number of occasions, most recently with the current drive to reform capital regulation, particularly as formulated by the Basle Committee (See Vol. 1998-3). At the cost only of some brief repetition it is a good place to begin because it is one of the few illustrations of a widely-held perception becoming, finally, reality – statutory law. The other areas where some quite remarkable perceptions are found include deposit insurance and central banking, also discussed below.