TIME: Almanac 1990/1990 Time Magazine Compact Almanac, The (1991)(Time).iso/time/062689/06268900.018

Text File | 1990-09-22 | 5KB | 89 lines

BUSINESS, Page 56

Don't Touch My Bailout

Bush's tough S & L bill survives an industry challenge


    When renegade House Republicans made a last-ditch attempt to
soften President Bush's tough savings-and-loan bailout bill last
week, there was nothing wimpy about his response. As the House
debated the legislation, the President corralled congressional
leaders and took his cause to the people. "It is time for the
American public and our Administration to say that enough is
enough," Bush said. If the House weakened the stringent new
regulations of the bill, the President warned, he would veto it.
By week's end Bush prevailed when the House approved a strong
bailout bill by a vote of 320 to 97. In all, 46 Republicans voted
against the measure. Since the Senate passed a similar version in
April, Bush's plan to rescue the thrift industry is likely to go
into effect next month.

    The plan, which will cost some $157 billion over the next ten
years, will allow the Government to close down or sell off more
than 500 insolvent savings institutions. To reform the rest of the
thrift industry, the bill tightens capital requirements so that S
& L owners would have more of their own money on the line.
Specifically, the bill calls for all thrifts immediately to post
$1.50 in reserves for each $100 in deposits and reach a level of
$3 in reserves by 1994.

    The most controversial provision is that thrifts would no
longer be allowed to count as capital an intangible asset known as
"goodwill." Typically, this comes into play when an acquirer buys
an ailing S & L whose liabilities exceed its assets; the difference
is called goodwill. So far, regulators have allowed S & L buyers
to count goodwill as capital in exchange for taking the failed
thrift out of the Government's hands. But having no capital of
their own at stake enabled some thrift owners to make risky and
often fraudulent loans without sufficient cash to back them up.
Said New York Democrat Charles Schumer: "The S & L industry has
been playing a giant game of roulette, and they have been gambling
with taxpayers' money. Without tough capital rules, we will be
telling these high-flying speculators, `O.K., go back to the
casinos.'"

    The House vote was a sharp blow to S & L industry lobbyists,
whose lavish courtship of Congressmen fostered in the mid-1980s
permissive legislation that is blamed for aggravating the thrift
crisis. The industry fought to weaken the capital requirements in
the current bill by pushing an amendment, sponsored by Illinois
Republican Henry Hyde, that would have allowed S & Ls a regulatory
hearing before they could be forced to comply with the new
standards. Hyde, the industry's most vociferous advocate, is a
leading recipient of S & L PAC contributions. After Bush threatened
to veto the bill if capital standards were weakened, the amendment
was firmly defeated.

    Bush did suffer one setback. He had hoped to finance $50
billion of the cost of the bailout with 30-year bonds issued by a
new Government agency, the Resolution Trust Corporation, which will
handle the sale of the assets of the 500 insolvent thrifts. Since
the bonds will be sold by the RTC rather than the Treasury, Bush
hoped they would be classified "off budget," meaning they would not
be counted as part of the federal deficit. But by carrying that
designation, they would have paid a higher interest rate than
Government bonds. That extra interest expense would increase the
overall cost of the bailout plan by an estimated $5 billion. The
House refused to go along with that sleight of hand and voted to
include the $50 billion in the federal budget. But the House
exempted the S & L spending from deficit limits set by the
Gramm-Rudman-Hollings law. Bush hopes to keep the financing
off-budget when the House and Senate bills are reconciled in a
conference committee.

    While the bailout plan may reassure S & L depositors, the tough
capital requirements will spell trouble for many marginal thrifts.
James Barth, chief economist of the Federal Home Loan Bank Board,
which regulates S & Ls, estimates that 674 thrifts, or almost
one-fourth of all federally insured U.S. savings institutions,
would fail to meet the new capital standards. As a result, many
thrifts would be forced to liquidate or combine with healthier
institutions.

    One persistent criticism of the Bush plan is that it fails to
provide as much money for the bailout as will eventually be needed.
By some estimates, the cost of cleaning up the industry could
exceed $300 billion over 30 years, with taxpayers picking up
two-thirds of the bill. The FHLBB reported last week that the 2,938
Government-insured thrifts in the U.S. posted losses of $3.4
billion during the first quarter of the year. Observes Alex
Sheshunoff, an industry analyst: "There's a lot more bad news to
come." In the S & L industry, unfortunately, the most pessimistic
forecasts usually turn out to be the most accurate ones.