Don't Touch My Bailout

By Barbara Rudolph

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-Holling s 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.

With reporting by Gisela Bolte/Washington and Richard Woodbury/Houston