S&L; Insurer May Need U.S. Bailout, GAO Says

The federal insurance fund that protects deposits at savings and loan associations is in much worse financial shape than previously believed and may require a major bailout by Congress, the congressional General Accounting Office reported Thursday.

The cost of shutting down or merging as many as 500 failing savings and loan associations could reach $36 billion or more, according to the latest GAO audit of the insurance fund. The Federal Savings and Loan Insurance Corp., which runs the insurance fund, has estimated its liability at only $22 billion.

The GAO, the investigative arm of Congress, said the FSLIC was being unduly optimistic. The actual shutdown of troubled institutions, it said, usually costs much more than the initial estimates.

If the GAO is right, the $36 billion in liabilities substantially exceeds the estimated $28 billion that the insurance fund will collect over the next 10 years from fees paid by the industry and from the sale of notes authorized by Congress.

And the liabilities could go even higher, GAO officials testified to the Senate Banking Committee, because the $36-billion estimate covers only the 500 institutions known to be troubled. More S&Ls; could fall into financial trouble, they said, particularly in the distressed Texas market.

Bert Ely, a savings industry consultant from Alexandria, Va., told the Banking Committee that losses could reach $64 billion. “Even though many thrifts are profitable and well-capitalized,” Ely said, “the industry is steadily being dragged down by an increasing number of insolvent and unprofitable thrifts.”

The GAO warned that healthy S&Ls;, which are paying a special assessment into the insurance fund, may decide to leave the system and join the less costly Federal Deposit Insurance Corp., which regulates banks. This could drain cash just when it is needed most, the GAO report said.

If the industry cannot supply the money needed for the fund, the GAO said, the only other source is the taxpayer.

The insurance fund protects deposits of up to $100,000 when an S&L; fails. Committee members took special pains to reassure depositors that Congress would stand by that insurance commitment even if it means using taxpayer revenue should the insurance fund run dry.

Congress Backs Program

“There is absolutely no doubt the U.S. Congress stands behind (the) deposit insurance program, “ said Sen. William Proxmire (D-Wis.), the committee chairman.

Sen. Jake Garn of Utah, the committee’s top-ranking Republican member, said: “Let’s not panic the American people and create a self-fulfilling prophecy. I want to keep this in perspective.”

Although two-thirds of the S&Ls; are profitable and earned $6.6 billion last year, the financially crippled institutions in the Southwest lost a massive $13.4 billion, Frederick D. Wolf, director of the GAO’s accounting division, told the Banking Committee.

The slump in the oil and gas industry in the Southwest “caused the bottom to fall out of the real estate industry,” wiping out the value of billions of dollars of loans made by the S&Ls;, Wolf said.

More Deterioration Seen

The GAO’s audits of the insurance fund for 1987 indicate “continuing deterioration of FSLIC’s financial condition and raise serious questions about its ability to deal with the industry’s still-growing problem,” Wolf said.

Because so many S&Ls; are weak, Wolf said, the industry itself probably cannot provide the money needed to keep the insurance fund strong. “Consequently,” he said, “further congressional action may well be needed to obtain adequate funding.”

There are 200 insolvent S&Ls; for which the Federal Savings and Loan Insurance Corp. has assumed direct responsibility and recorded $17 billion in potential liabilities.

An additional 300 institutions are incurring losses and are potential future cases for direct involvement by the regulators. The GAO says losses from this group of 300 could balloon to $19 billion, far beyond the optimistic estimate of $5.3 billion by federal regulators.

The Federal Home Loan Bank Board, which oversees the nation’s 3,147 insured savings institutions, is trying to find buyers or merger partners for ailing S&Ls; to avoid the massive cost of shutting their doors and paying off the insured depositors.

The bank board Wednesday announced a $2-billion deal in which four insolvent S&Ls; were acquired by Southwest Savings Assn. of Dallas, whose owner, Caroline Hunt, has a fortune estimated at $900 million. The FSLIC will have a 50% interest in the merged S&L.;

To attract buyers such as Southwest, the FSLIC is offering to furnish new capital and guarantees that the new owners will not lose money on the bad loans acquired in the mergers.

‘Explosion of Liability’

GAO officials say privately that they are concerned about the guarantees. “We can have an explosion in cost that we do not know about” because the FSLIC does not provide detailed information about the liabilities it might incur as a result of the guarantees, one official said.

“They have tried to do the right thing and they are under a lot of pressure,” this official said. He expressed doubt, however, that there are enough skilled managers and negotiators to arrange the necessary rescue of hundreds of ailing institutions.