TIME: Almanac 1993/TIME Almanac 1993.iso/time/051490/0514205.000

Text File | 1992-08-28 | 6.0 KB | 124 lines

                                                                                BUSINESS, Page 74

MONEY ANGLES

Go Slow! That S&L Junk Is Worth Something


By Andrew Tobias


    Having been repeatedly underestimated, the size of the
savings and loan bailout -- at the $500 billion so often cited
-- may finally be a bit overblown.

    For one thing, calling the cost to taxpayers $500 billion
is sort of like calling your $150,000 mortgage a $500,000
problem because that's how much, with interest, it will cost
to repay. But other factors may also eventually contain the
vast damage that has unquestionably been done. (The damage is
not that S&Ls have failed; we had too many S&Ls anyway. The
damage is in half-built or largely vacant shopping centers and
office towers no one wants or needs -- all those resources
misdirected when, as always, there was so much that did need
doing.)

    -- First, some of the S&L assets are good. For example: the
home of David Paul, until recently chairman of Miami's CenTrust
Savings. CenTrust is the thrift that it's estimated will cost
taxpayers $2 billion; Paul is the man who bought a $13 million
Rubens for the bank but hung it in his home for safekeeping.
And what a home! I was only allowed to see the guesthouse --
8,200 sq. ft. -- which the real estate agent thought was
unoccupied. Instead, we found toddlers downstairs with a nanny
and, upstairs, a freshly unmade bed with a large gun tossed
casually in the middle. ("This is the bedroom; this is the
bathroom; this is the gun.") If CenTrust's mortgage on this
property becomes an asset of the Resolution Trust Company, the
agency formed by Congress to liquidate failed S&Ls, the RTC
should recoup at least a good portion of the loan.

    -- Second, some decent people are working on the problem.
One of them is William Seidman, the chief U.S. banking
regulator, who has generally been frank and realistic in trying
to handle the mess -- too frank and realistic for President
Bush, who aims to replace him with William Taylor, a low-key
Federal Reserve veteran. But, however long Seidman stays,
thousands of other professionals are involved in the bailout.
Faced with the task of recruiting staff at a fraction of the
pay they'd earn in private industry (running S&Ls into the
ground, say), the RTC has, sensibly, been luring seasoned
executives out of retirement. Further, as required by law, the
agency has been farming out most of the task to the private
sector, where a growing army of appraisers, attorneys, property
managers and real estate agents is massing to evaluate, manage
and obtain fair value for RTC assets. These folks will,
collectively, reap billions in fees from the RTC. But it may
not be unreasonable to think that most of them will do a
conscientious job for the taxpayer in return.

    The RTC is criticized for moving too slowly, but at least
when it comes to some of its assets, slowly is just the right
pace. A rush to sell could lower real estate prices, forcing
new defaults and a downward spiral. It is thus somewhat
alarming to note that this is exactly the direction the RTC of
late seems to be heading. As Barron's subtly headlined its
April 30 cover story on the agency: SELL! SELL! SELL!

    One of the RTC's dumber moves is the project of some
well-meaning but impatient Harvard business school students:
a huge property auction scheduled for this summer. It's bound
to attract wide news coverage, and that risks headlines like:
RTC AUCTION FAILS TO DRAW BIDDERS and UNCLE SAM HOLDS A FIRE
SALE. Conceivably, all the properties will fetch high prices.
But why risk damaging the perceived value of all the rest of
the property the RTC has for sale?

    Similarly, the RTC has begun a push to sell off its junk
bonds. Dumb! Unlike a foreclosed home with a leaky roof, junk
bonds need no maintenance. The RTC should just keep them. Some
will pay interest (at fabulously high rates) and then go bust;
others will go bust right away; still others may actually one
day be redeemed at par. But the only way to sell them now is
at prices so cheap that they're attractive to buyers, and if
they're attractive, why not keep them? The junk-bond market is
already so weak, it seriously threatens the insurance industry.
It needs no additional selling pressure from Uncle Sam.

    Other assets the RTC could hang on to are raw land and
credit-card debt. Admittedly, these are tiny pieces of the pie,
but raw land doesn't deteriorate. Why rush to sell it? And as
for the credit cards, can't you just see it? "Dear Cardholder:
Your Visa account has been assumed by the United States of
America. Overdue balances will be assigned to the Internal
Revenue Service for collection." I'm just kidding, of course,
I think, but c'mon. Bad debts would drop through the floor. It
would be the most profitable credit-card operation in the
country, and the taxpayers would own it!

    The thing about going slowly is that, with a bit of luck and
growth and inflation, time alone can solve problems that fire
sales would only compound. Take the farm crisis in 1986. Farm
loans were going bad by the thousands; farm-state banks were
closing; agencies of the Federal Government owned vast tracts
of farmland throughout the Midwest. Nobody wanted to buy. Yet
four years later, in part because the Government did not rush
to sell, the price of farmland is up substantially.

    Yes, money-losing thrifts should be shuttered or sold
forthwith. Yes, properties must be responsibly maintained. And,
yes, in any undertaking so vast, there will inevitably be
bumbling and horror stories. But the RTC ought not to rush to
sell assets or call loans that, with a little patience and
management, may slowly work out. The alternative is so dire as
to be unacceptable. And seeing the risks, it's hard to imagine
that the Federal Reserve, too, won't be doing what it can to
keep real estate prices from collapsing.

    My money's on the Fed and the RTC -- but I'm hedging my
bets.