TIME: Almanac 1993/TIME Almanac 1993.iso/time/121889/12188900.026

Text File | 1992-09-23 | 5.8 KB | 108 lines

                ¡╬                                                            NATION, Page 40

Warning: Further -- and Maybe Bigger -- Federal Bailouts Ahead


Risky loans and sloppy supervision could lead to crises that
dwarf the $300 billion savings and loan fiasco


    After more than two troubled years as the Government's top
savings and loan regulator, M. Danny Wall fell victim to the
nation's spreading S&L scandal. The clamor for his ouster
mounted last month after lower-ranking bank examiners told
Congress that Wall had unduly delayed for 21 months a Government
takeover of high-flying financier Charles Keating's Lincoln
Savings & Loan Association, whose collapse could cost taxpayers
$2.5 billion. Last week Wall finally bowed to the pressure and
resigned as director of the Office of Thrift Supervision. He had
been victimized, Wall complained, by "simplistic efforts to find
a scapegoat to shoulder the blame for the entire thrift crisis."

    That crisis could soon become worse, because new
requirements designed to strengthen the thrifts could instead
push many of them into extinction. Starting last week, S&Ls must
greatly increase their capitalization as a hedge against losses
from problem loans, interest-rate swings and bad investment
decisions. Among other things, they will be required to maintain
"risk-based capital" equal to 6.4% of their risky assets, such
as shopping centers and fancy resorts. Because many thrifts are
only marginally profitable, raising the funds to meet the
standards may prove impossible for them. Some analysts warn that
half the nation's 2,900 thrifts could eventually fail or be
merged, voluntarily or involuntarily, adding billions to the
$300 billion cost of the industry bailout. An early casualty:
City Federal Savings Bank, New Jersey's largest thrift, was
taken over by federal regulators on Friday, after recording huge
losses from real estate ventures.

    Before the ominous S&L predictions had a chance to sink in,
alarms were going off about other potentially monumental
crises. A report by Budget Director Richard Darman warned that
careless management at such agencies as the Veterans
Administration and the Department of Energy may have allowed
scandals rivaling the estimated $8 billion imbroglio at the
Department of Housing and Urban Development to go undetected.
But the gravest worries were triggered by concerns about the
solvency of more than $5 trillion in federal credit and
insurance programs that cover everything from bank deposits to
student loans and Third World aid. While no one expects all such
programs to fail, bad debts and write-offs are steadily
increasing. "Losses from these programs have already cost the
taxpayers tens of billions of dollars and have had a significant
impact on the federal deficit," warns Charles Bowsher, the U.S.
Comptroller General. Adds Michigan Democrat John Dingell, who
chairs a House subcommittee on oversight and investigations: "It
is as if every man, woman and child in this country each
co-signed a personal loan for $20,000."

    The most disturbing fact is that no one knows how severe
the problems may be. In a report to Congress last month, the
General Accounting Office described the same pattern of sloppy
accounting and slack Government supervision that allowed the S&L
debacle to go unchecked. Because many agencies kept such poor
books, GAO auditors could not even determine how much of the $5
trillion is at risk of default. "The ignorance, incompetence and
corruption in many of the Government loan and loan-guarantee
programs are appalling," says Dingell.

    Where GAO investigators managed to decipher an agency's
accounts, they often found a far grimmer picture than the
agency provided. While the Federal Housing Administration, which
insures home mortgages, reported a loss of $858 million in 1988,
GAO auditors found that the shortfall was actually $4.2 billion.

    There is also concern over the Pension Benefit Guaranty
Corp., which insures the private pension plans of 66 million
Americans and is currently $1.5 billion in the red. Raymond
Maria, the Labor Department's acting inspector general, warned
Congress last month that lax Federal Government supervision and
law enforcement "has created a window of opportunity for those
who would embezzle and steal from plan participants." But
policing pensions is virtually impossible because the Labor
Department has about 300 inspectors for nearly 900,000 plans
nationwide. Says Maria: "Our goal is not to frighten people
unnecessarily but to stimulate concern where it is needed and
to avoid potential future crises. We do not want to be in the
position of saying, `I told you so.'"

    No programs have been growing faster than so-called
Government-Sponsored Enterprises, which include such entities
as the Federal National Mortgage Association and the Student
Loan Marketing Association. Taxpayers may be called on to bail
out any GSEs that get into financial trouble, as they were when
the Farm Credit System amassed huge losses during the rural
crisis of the mid-1980s. The Government has also increasingly
shifted funds from direct-loan programs, which worsen the budget
deficit, to loan guarantees, which don't show up on the budget
until borrowers default.

    Few critics of the credit and insurance programs doubt
their social value. Among other benefits, they have made homes
more affordable, enhanced educational opportunities and rescued
Chrysler and New York City from bankruptcy. But the sprawling
programs are spread over dozens of federal agencies and receive
scant congressional oversight. Like the once obscure S&Ls that
now make headlines almost daily, these ambitious federal
programs run the risk of getting dangerously out of hand -- if
they have not already.