Against Using Tax Funds : S&Ls; Should Finance Bailout, Official Says
A senior Treasury Department official says that when the federal fund that insures deposits in savings institutions needs more money, the industry--not taxpayers--should make the first contribution.
“There comes a point . . . when you’re really burdening the industry so that it’s self-defeating,” said George D. Gould, undersecretary for finance. “But I don’t think you’re there yet.”
In an interview recently that touched on the stock market, the debate over new powers for banks and the condition of the nation’s savings institutions, the pipe-puffing former investment banker said it seems probable that the Federal Savings and Loan Insurance Corp. will need more money beyond the infusion provided by Congress last August.
Gould, the No. 3 official at Treasury, is the Reagan Administration’s top policy-maker for banking and finance. He has been mentioned as a likely successor to Treasury Secretary James A. Baker III, should Baker resign as expected this summer to run the presidential campaign of Vice President George Bush.
The Federal Home Loan Bank Board estimates that it will cost $21.8 billion to clean up the roughly 500 insolvent S&Ls.; However, private analysts say it could cost $50 billion to $64 billion.
‘$20 Billion Not Enough’
The insurance fund is expected to have only about $20 billion to work with over three years. Most of that is coming from $10.8 billion in bond sales, which are being paid off by a special assessment on the industry.
The $64-billion figure is “absurd,” Gould said, but he conceded “that $20 billion is probably not enough.”
The question is when and how to provide more money.
In the debate last year, the Administration urged a $15-billion bond sale, while the industry was pushing to hold it to $5 billion. The $10.8 billion was a last-minute compromise.
Gould said the industry could pay for another $5-billion bond sale, although he conceded that another $15 billion probably would be too much.
Leaders of the industry’s largest trade group, the U.S. League of Savings Institutions, say healthy S&Ls; are paying all they can without deteriorating financially.
“It’s a clever maneuver, but it’s not clever enough,” Gould said of the league’s position.
“The new gambit that ‘Gee, it’s too big for us to handle’ means ‘Gee, the taxpayers have got to bail us out,”’ he said.
Merging the FSLIC and the Federal Deposit Insurance Corp. as a means of avoiding a taxpayer bailout is a bad idea, Gould said, because it would damage confidence in the FDIC.
Thoughtful Debate Needed
Sen. Donald W. Riegle Jr. (D-Mich.), who is expected to become chairman of the Senate Banking Committee next year, said two weeks ago that S&Ls; will be at the top of the committee’s list of priorities when Congress returns after the November elections.
Gould said it might help public confidence if Congress began re-examining the problem next year, but he said, for now, FSLIC has all it can spend without beginning to flood the market with foreclosed real estate.
The debate “should be done in kind of a thoughtful environment, not ‘Gee, we ought to respond to a crisis,’ because there is not a near-term crisis,” he said.
The S&L; mess was one of Gould’s first assignments after being appointed in November, 1985.
Through last fall and winter, he led Administration’s push for the repeal of the Depression-era Glass-Steagall Act, which prevents commercial banks from underwriting most securities.
Most recently, he headed an interagency working group that formulated the Administration’s policy response to the October stock market crash.
Gould said he was cheered by the Senate’s lopsided, 94-2 approval of a bill substantially repealing Glass-Steagall. However, he said he has been a little discouraged by the slow pace of the bill in the House. He puts the bill’s chances of enactment at 50-50.
Regarding Democratic criticism of the Administration’s stock market policy, Gould conceded that the working group recommended few changes.
