Money Angles Go Slow!

By Andrew Tobias

Having been repeatedly underestimated, the size of the savings and loan bailout -- at the $500 billion so often cited -- may finally be a bit overblown.

For one thing, calling the cost to taxpayers $500 billion is sort of like calling your $150,000 mortgage a $500,000 problem because that's how much, with interest, it will cost to repay. But other factors may also eventually contain the vast damage that has unquestionably been done. (The damage is not that S&Ls have failed; we had too many S&Ls anyway. The damage is in half- built or largely vacant shopping centers and office towers no one wants or needs -- all those resources misdirected when, as always, there was so much that did need doing.)

-- First, some of the S&L assets are good. For example: the home of David Paul, until recently chairman of Miami's CenTrust Savings. CenTrust is the thrift that it's estimated will cost taxpayers $2 billion; Paul is the man who bought a $13 million Rubens for the bank but hung it in his home for safekeeping. And what a home! I was only allowed to see the guesthouse -- 8,200 sq. ft. -- which the real estate agent thought was unoccupied. Instead, we found toddlers downstairs with a nanny and, upstairs, a freshly unmade bed with a large gun tossed casually in the middle. ("This is the bedroom; this is the bathroom; this is the gun.") If CenTrust's mortgage on this property becomes an asset of the Resolution Trust Company, the agency formed by Congress to liquidate failed S&Ls, the RTC should recoup at least a good portion of the loan.

-- Second, some decent people are working on the problem. One of them is William Seidman, the chief U.S. banking regulator, who has generally been frank and realistic in trying to handle the mess -- too frank and realistic for President Bush, who aims to replace him with William Taylor, a low-key Federal Reserve veteran. But, however long Seidman stays, thousands of other professionals are involved in the bailout. Faced with the task of recruiting staff at a fraction of the pay they'd earn in private industry (running S&Ls into the ground, say), the RTC has, sensibly, been luring seasoned executives out of retirement. Further, as required by law, the agency has been farming out most of the task to the private sector, where a growing army of appraisers, attorneys, property managers and real estate agents is massing to evaluate, manage and obtain fair value for RTC assets. These folks will, collectively, reap billions in fees from the RTC. But it may not be unreasonable to think that most of them will do a conscientious job for the taxpayer in return.

The RTC is criticized for moving too slowly, but at least when it comes to some of its assets, slowly is just the right pace. A rush to sell could lower real estate prices, forcing new defaults and a downward spiral. It is thus somewhat alarming to note that this is exactly the direction the RTC of late seems to be heading. As Barron's subtly headlined its April 30 cover story on the agency: SELL! SELL! SELL!

One of the RTC's dumber moves is the project of some well-meaning but impatient Harvard business school students: a huge property auction scheduled for this summer. It's bound to attract wide news coverage, and that risks headlines like: RTC AUCTION FAILS TO DRAW BIDDERS and UNCLE SAM HOLDS A FIRE SALE. Conceivably, all the properties will fetch high prices. But why risk damaging the perceived value of all the rest of the property the RTC has for sale?

Similarly, the RTC has begun a push to sell off its junk bonds. Dumb! Unlike a foreclosed home with a leaky roof, junk bonds need no maintenance. The RTC should just keep them. Some will pay interest (at fabulously high rates) and then go bust; others will go bust right away; still others may actually one day be redeemed at par. But the only way to sell them now is at prices so cheap that they're attractive to buyers, and if they're attractive, why not keep them? The junk-bond market is already so weak, it seriously threatens the insurance industry. It needs no additional selling pressure from Uncle Sam.

Other assets the RTC could hang on to are raw land and credit-card debt. Admittedly, these are tiny pieces of the pie, but raw land doesn't deteriorate. Why rush to sell it? And as for the credit cards, can't you just see it? "Dear Cardholder: Your Visa account has been assumed by the United States of America. Overdue balances will be assigned to the Internal Revenue Service for collection." I'm just kidding, of course, I think, but c'mon. Bad debts would drop through the floor. It would be the most profitable credit- card operation in the country, and the taxpayers would own it!

The thing about going slowly is that, with a bit of luck and growth and inflation, time alone can solve problems that fire sales would only compound. Take the farm crisis in 1986. Farm loans were going bad by the thousands; farm-state banks were closing; agencies of the Federal Government owned vast tracts of farmland throughout the Midwest. Nobody wanted to buy. Yet four years later, in part because the Government did not rush to sell, the price of farmland is up substantially.

Yes, money-losing thrifts should be shuttered or sold forthwith. Yes, properties must be responsibly maintained. And, yes, in any undertaking so vast, there will inevitably be bumbling and horror stories. But the RTC ought not to rush to sell assets or call loans that, with a little patience and management, may slowly work out. The alternative is so dire as to be unacceptable. And seeing the risks, it's hard to imagine that the Federal Reserve, too, won't be doing what it can to keep real estate prices from collapsing.

My money's on the Fed and the RTC -- but I'm hedging my bets.