NATION, Page 40Warning: Further -- and Maybe Bigger -- Federal Bailouts AheadRisky loans and sloppy supervision could lead to crises thatdwarf 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
