Closed Doors

An ominous S and L failure

After federal regulators locked the doors at the failed Economy Savings and Loan Association in Chicago last week, worried depositors immediately began gathering on the sidewalk outside. For one white-haired woman, the scene is just brought what back happened haunting in the memories. '30s," she "This fretted.

But it was not exactly like the early 1930s, when depositors might have lost their money. H. Brent Beesley, director of the Federal Savings and Loan Insurance Corp. (FSLIC), was on hand last week to reassure the customers personally. Be cause their accounts were protected by the U.S. Government up to a maximum of $100,000, he told them, they would be get ting their money back within ten days.

Beesley also ordered signs posted on the S and L's windows telling savers that their accounts were insured.

Economy Savings, a small institution with deposits of $69 million, is the only S and L in a decade to be liquidated by the FSLIC, but it may be only the first of many in the coming months. Like all S and Ls, Economy Savings was trapped in a profit squeeze caused by unrelenting high interest rates. It was forced to pay as much as 15% to attract deposits, while carrying many old mortgages on its books that earned less than 10%.

The firm also apparently compounded its problems through ill-advised specula tion in the market for Government securities.

Unless interest rates drop precipitously, the U.S.'s 4,600 S and Ls are likely to lose $5 billion this year, and scores of weak institutions could easily collapse. In 15 months the number of S and Ls on the FSLIC'S list of "problem cases" has jumped from 79 to 246. Last year the agency saved eleven insolvent S and Ls by ar ranging shotgun mergers with healthier institutions. These rescue operations cost the agency $1.3 billion out of its $6.5 billion reserve fund. The bal ance sheet at Economy Savings, however, was apparently so dismal that no takers could be found.

So far the Reagan Administration has resisted recommending any emergency aid to S and Ls. Treasury Secretary Donald Regan argues that the President's economic program of budget reductions, tax cuts and tight regulation of the money supply will eventually bring down interest rates and relieve pressure on financial institutions. The fate of hundreds of beleaguered thrifts now rests on that strategy.

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