S&L Hot Seat

By John Greenwald

At the height of his power in the Roaring Eighties, Charles Keating commanded an estimated $100 million personal fortune, controlled $1 billion in financial assets and counted a handful of U.S. Senators among his powerful buddies. Last week he stood as a wretched symbol of the past decade's financial follies. After the former owner of California's bankrupt Lincoln Savings and Loan was indicted on 42 counts of criminal fraud and was unable to raise the $5 million bail, police handcuffed and jailed him. California alleges that Keating bilked investors who bought $250 million of now virtually worthless junk bonds. The state's charges were the latest in a flood of legal actions against the disgraced businessman. Overall, taxpayers will have to pay more than $2 billion to clean up the mess left by Lincoln's collapse, one of the costliest in the nation.

Keating was the most visible villain last week in an S&L debacle that could cost Americans as much as $1 trillion, or some $30 a month for every household over the next four decades. In inflation-adjusted dollars, that is nearly twice the cost of the Vietnam War and almost four times the cost of the Korean conflict. So far, the government has seized more than 490 insolvent thrifts, or nearly one-fifth the entire industry. An additional 600 are troubled and may fail.

Even as jail doors slammed behind Keating, who remained in prison pending his arraignment next month, shock waves from the thrift crisis rippled across the U.S. The impact contributed to the budget deadlock in Washington and aggravated the slump in real estate prices in cities glutted with condominiums and office towers. In Denver federal regulators filed a $200 million lawsuit against the President's son Neil Bush and 10 other officials of the failed Silverado S&L, charging them with "gross negligence." Meanwhile, Neil Bush prepared to respond this week to previous federal charges that he abused his role as a Silverado director. In Congress, L. William Seidman, chairman of the Resolution Trust Corporation, asked for at least $100 billion for fiscal 1991 to keep the S&L bailout moving. Only a year ago, regulators had expected that $50 billion would do the job.

The bailout faces the added specter of a slumping U.S. economy. A recession could raise the already astronomical price of the bailout by pushing more thrifts into bankruptcy and making it harder for the government to find buyers for seized S&Ls and their assets. Federal Reserve Chairman Alan Greenspan warned Congress last week that the Persian Gulf crisis has "introduced new and substantial risks" to the economy. Washington's latest measures of economic activity showed just how gloomy the outlook has become, as the Consumer Price Index rose 0.8% in August, equivalent to an annual rate of 9.6%.

The government's yard of properties is filling up fast, with few buyers in sight. The RTC last week canceled plans for a much ballyhooed November auction of $300 million worth of property that was to have raised sorely needed cash. While the agency attributed the cancellation to disagreements with the auction company, experts pinned part of the blame on sluggish real estate markets and tight credit policies among now cautious lenders. In a sign of the agency's eagerness to unload inventory, Seidman last week urged the government to provide financing for buyers to speed the sale of $50 billion in RTC holdings by the end of the year.

The bailout's relentless drain on the U.S. Treasury provided a grim backdrop to the stalemated budget talks. After 125 days of partisan wrangling, negotiators from both parties were nowhere near agreement last week on how to pare $50 billion from the 1991 deficit and $500 billion over the next five years. If a deal is not reached by Oct. 1, the government could face $100 billion of across-the-board budget cuts. While lawmakers contemplated legislation to avert that sweeping move, the White House threatened to veto such a measure in order to force a resolution of the budget deadlock. Said President Bush at week's end: "We're down to the wire."

Yet the budget talks only nibble at the edges of the real deficit problem, partly because both parties agreed earlier this year to keep the S&L bailout off the books. If it were included, the red ink would swell next year from $165 billion to $230 billion. The negotiators are thus struggling to find spending cuts and tax hikes that would still fall short of covering the rising cost of the bailout. Both sides have agreed to boost taxes on alcohol, gasoline and autos priced at $30,000 and up. But such increases would go only partway toward paying for Bush's cherished reduction of the capital-gains tax from a top rate of 33% to 15%.

The budget negotiators remain far apart over who should bear the burden of politically explosive cuts in entitlement spending. Though both sides are willing to slash $73 billion from Medicare over the next five years, the agreement ends there. The White House would spread the pain equally among doctors, hospitals and patients, but the Democrats have avoided specific proposals.

The shortage of courage on all sides in the budget talks provides a pointed reminder of Washington's failure to keep the S&L crisis from raging out of control in the 1980s. After deregulating the industry at the start of the decade, politicians looked the other way as reckless thrifts financed countless condominium blocks and office towers that now stand empty. Meanwhile, many questionable -- and sometimes criminal -- business practices were allowed to flourish. When bond salesmen for Keating's Lincoln Savings and Loan went to work, a memo advised them: "Always remember the weak, meek and ignorant are always good targets."

The big questions for the White House and Congress are how to complete the S&L bailout as swiftly as possible and how to prevent future financial fiascoes. Proposed remedies range from a complete overhaul of banking and thrift legislation to a soak-the-rich scheme that Joseph Kennedy II, a member of the House Banking Committee, put forward last week. Kennedy's plan would slap surtaxes on individuals with incomes over $100,000 a year and most corporations.

Any plan for halting the S&L hemorrhaging requires a healthy economy. While . politicians can do little about such shocks as the latest Middle East conflict, it is long past time for Washington to get on with closing the budget deficit. A step in that direction would boost financial confidence, reduce interest rates and help the economy withstand the ravages of wheeler- dealer businessmen at home and overweening dictators abroad.

With reporting by Michael Duffy and Richard Hornik/Washington