New Agency Would Liquidate Problem Loans of Failed Thrifts : S&Ls; Offer Plan to Aid Deposit Insurer
The Federal Home Loan Bank Board received a formal proposal from the savings and loan industry Wednesday that outlines the financing, management and other details of a new government agency designed to liquidate problem loans of failed S&Ls.;
The proposal is, in effect, a bail-out plan for the Federal Savings and Loan Insurance Corp., the understaffed and underfunded agency known as FSLIC that liquidates insolvent S&Ls; and insures customer deposits up to $100,000 per account.
The proposed new corporation--to be called the Federal Savings & Loan Asset Management Assn., or FSLAMA--would be controlled by the bank board but run privately. Its principal task would be to buy and dispose of the more than $2 billion in problem loans now being administered by the FSLIC.
The recommendation amounts to a counterattack against the rapidly growing volume of bad loans in the savings and loan industry. The FSLIC fund that insures customer deposits had a face value of $5.9 billion at the end of 1984, but the value has been eroding alarmingly because of a rash of expensive S&L; failures in the past year.
FSLAMA would have a maximum initial capitalization, or net worth, of about $1.5 billion, according to the proposal. Up to $1 billion would be provided in cash by the 12 district banks of the Federal Home Loan Bank system, and another $500 million in equity would come from the value of problem loans being administered by the FSLIC.
Both the FSLIC and the 12 district banks are part of the bank board, the principal supervisory agency for the nation’s 3,200 federally insured savings and loans.
The proposal was well received by bank board Chairman Edwin J. Gray, who said in a statement that he “welcomes this application.” Bank board General Counsel Norman H. Raiden has been named to head a staff study of the recommendation, Gray added. Gray has said he expects the bank board to approve such a proposal shortly.
The proposal also recommends that:
- FSLAMA go out of business “when its special services are no longer required.” One executive who helped write the proposal estimated that the job could be done in five to seven years.
- An immediate search be undertaken for a qualified chief executive to head the corporation. “The person has much more of a chance of being a national hero than a national failure,” the executive added. “This has a good chance of succeeding.” Some industry officials have speculated that the job could pay as much as $500,000 a year.
- The board of directors be chosen by the bank board but the staff be recruited from the best people available in the private sector. The agency should be a “profit-making enterprise,” the proposal emphasized.
The proposed new agency has the nickname of the 406 Corp., because the authority for its formation comes from Section 406(a) of the National Housing Act of 1934. Proponents say the 406 Corp. is reminiscent of the Depression-era Home Owners Loan Corp., an agency created by Congress to head off massive home foreclosures and instill confidence in the nation’s banking system.
The 406 Corp. recommendation carries considerable clout because it emanates from some of the most powerful people in the savings and loan industry. Among the members of the 15-member advisory group are William McKenna, a Los Angeles lawyer, and William O’Connell, head of the U.S. League of Savings Institutions, the S&L; industry’s principal trade group.
The proposal actually amplifies similar recommendations made in the past two months by the Chicago-based U.S. League and the U.S. Savings & Loan Advisory Council, which McKenna heads.
