TIME: Almanac 1993/TIME Almanac 1993.iso/time/100190/10011010.000

Text File | 1992-08-28 | 6.9 KB | 155 lines

                äN                                                            NATION, Page 34

S&L Hot Seat


Thrift honchos squirm and politicians dither as the economy
slides

By JOHN GREENWALD -- Reported by Michael Duffy and Richard
Hornik/ Washington


    At the height of his power in the Roaring Eighties, Charles
Keating commanded an estimated $100 million personal fortune,
controlled $1 billion in financial assets and counted a handful
of U.S. Senators among his powerful buddies. Last week he stood
as a wretched symbol of the past decade's financial follies.
After the former owner of California's bankrupt Lincoln Savings
and Loan was indicted on 42 counts of criminal fraud and was
unable to raise the $5 million bail, police handcuffed and
jailed him. California alleges that Keating bilked investors
who bought $250 million of now virtually worthless junk bonds.
The state's charges were the latest in a flood of legal actions
against the disgraced businessman. Overall, taxpayers will have
to pay more than $2 billion to clean up the mess left by
Lincoln's collapse, one of the costliest in the nation.

    Keating was the most visible villain last week in an S&L
debacle that could cost Americans as much as $1 trillion, or
some $30 a month for every household over the next four
decades. In inflation-adjusted dollars, that is nearly twice
the cost of the Vietnam War and almost four times the cost of
the Korean conflict. So far, the government has seized more
than 490 insolvent thrifts, or nearly one-fifth the entire
industry. An additional 600 are troubled and may fail.

    Even as jail doors slammed behind Keating, who remained in
prison pending his arraignment next month, shock waves from the
thrift crisis rippled across the U.S. The impact contributed
to the budget deadlock in Washington and aggravated the slump
in real estate prices in cities glutted with condominiums and
office towers. In Denver federal regulators filed a $200
million lawsuit against the President's son Neil Bush and 10
other officials of the failed Silverado S&L, charging them with
"gross negligence." Meanwhile, Neil Bush prepared to respond
this week to previous federal charges that he abused his role
as a Silverado director. In Congress, L. William Seidman,
chairman of the Resolution Trust Corporation, asked for at
least $100 billion for fiscal 1991 to keep the S&L bailout
moving. Only a year ago, regulators had expected that $50
billion would do the job.

    The bailout faces the added specter of a slumping U.S.
economy. A recession could raise the already astronomical price
of the bailout by pushing more thrifts into bankruptcy and
making it harder for the government to find buyers for seized
S&Ls and their assets. Federal Reserve Chairman Alan Greenspan
warned Congress last week that the Persian Gulf crisis has
"introduced new and substantial risks" to the economy.
Washington's latest measures of economic activity showed just
how gloomy the outlook has become, as the Consumer Price Index
rose 0.8% in August, equivalent to an annual rate of 9.6%.

    The government's yard of properties is filling up fast, with
few buyers in sight. The RTC last week canceled plans for a
much ballyhooed November auction of $300 million worth of
property that was to have raised sorely needed cash. While the
agency attributed the cancellation to disagreements with the
auction company, experts pinned part of the blame on sluggish
real estate markets and tight credit policies among now
cautious lenders. In a sign of the agency's eagerness to unload
inventory, Seidman last week urged the government to provide
financing for buyers to speed the sale of $50 billion in RTC
holdings by the end of the year.

    The bailout's relentless drain on the U.S. Treasury provided
a grim backdrop to the stalemated budget talks. After 125 days
of partisan wrangling, negotiators from both parties were
nowhere near agreement last week on how to pare $50 billion
from the 1991 deficit and $500 billion over the next five
years. If a deal is not reached by Oct. 1, the government could
face $100 billion of across-the-board budget cuts. While
lawmakers contemplated legislation to avert that sweeping move,
the White House threatened to veto such a measure in order to
force a resolution of the budget deadlock. Said President Bush
at week's end: "We're down to the wire."

    Yet the budget talks only nibble at the edges of the real
deficit problem, partly because both parties agreed earlier
this year to keep the S&L bailout off the books. If it were
included, the red ink would swell next year from $165 billion
to $230 billion. The negotiators are thus struggling to find
spending cuts and tax hikes that would still fall short of
covering the rising cost of the bailout. Both sides have agreed
to boost taxes on alcohol, gasoline and autos priced at $30,000
and up. But such increases would go only partway toward paying
for Bush's cherished reduction of the capital-gains tax from
a top rate of 33% to 15%.

    The budget negotiators remain far apart over who should bear
the burden of politically explosive cuts in entitlement
spending. Though both sides are willing to slash $73 billion
from Medicare over the next five years, the agreement ends
there. The White House would spread the pain equally among
doctors, hospitals and patients, but the Democrats have avoided
specific proposals.

    The shortage of courage on all sides in the budget talks
provides a pointed reminder of Washington's failure to keep the
S&L crisis from raging out of control in the 1980s. After
deregulating the industry at the start of the decade,
politicians looked the other way as reckless thrifts financed
countless condominium blocks and office towers that now stand
empty. Meanwhile, many questionable -- and sometimes criminal

salesmen for Keating's Lincoln Savings and Loan went to work,
a memo advised them: "Always remember the weak, meek and
ignorant are always good targets."

    The big questions for the White House and Congress are how
to complete the S&L bailout as swiftly as possible and how to
prevent future financial fiascoes. Proposed remedies range from
a complete overhaul of banking and thrift legislation to a
soak-the-rich scheme that Joseph Kennedy II, a member of the
House Banking Committee, put forward last week. Kennedy's plan
would slap surtaxes on individuals with incomes over $100,000
a year and most corporations.

    Any plan for halting the S&L hemorrhaging requires a healthy
economy. While politicians can do little about such shocks as
the latest Middle East conflict, it is long past time for
Washington to get on with closing the budget deficit. A step
in that direction would boost financial confidence, reduce
interest rates and help the economy withstand the ravages of
wheeler-dealer businessmen at home and overweening dictators
abroad.