Close or Clean Up Ailing Thrifts : Congress Must Provide Billions So Regulators Can Get Control
Within days, depositors in two Orange County thrift institutions liquidated last week will receive $1.3 billion from the Federal Savings and Loan Insurance Corporation. After disposing of the thrift’s assets, the FSLIC estimates that the total cost of shutting down the institutions will be $931 million.
Where do these two thrifts and their large cost to the FSLIC fit into the national thrift industry crisis? More important, what does their condition suggest for a solution?
For insured depositors in thrifts and banks, there is no problem. The problem arises for taxpayers, who must bear the ultimate responsibility for the growing FSLIC costs. The Orange County thrifts--American Diversified Savings Bank and North America Savings and Loan--are two of approximately 500 thrifts that are insolvent, based on the most commonly used accounting principles. These thrifts have about $145 billion in assets; based on the FSLIC’s cost to close thrifts in 1987, it will cost the FSLIC $50 billion to close them this year.
Often overlooked are the additional 515 thrifts with $255 billion in assets whose accounting net worth is nearly, but not quite, zero. Accounting net worth is based on the value of assets when they are acquired--not on their current market value.
Based on market values, these thrifts are almost certainly insolvent. Because these thrifts’ market-value insolvency is not as great as those that are insolvent by both techniques, it should cost FSLIC less to close them. But if the cost is as little as 10 cents per dollar of assets, the cost could be $25 billion, raising the total to an estimated $75 billion.
In truth, no one knows precisely what the cost will be, because market value estimates are imperfect. The experience of the 1980s suggests strongly, however, that by leaving insolvent institutions open and in the control of the managers and directors who are responsible for the insolvency, the admittedly large cost--whatever it is--will grow at an alarming rate.
To remedy the problem, Congress and the next President must take direct control of the government’s response. The federal regulator is the Federal Home Loan Bank Board, which also directs the FSLIC. And the bank board is overwhelmed. Despite transparent claims to the contrary, the bank board and the FSLIC do not remotely have the financial and human resources to close insolvent thrifts or to control their risk-taking until they can be closed.
Painting the rosiest picture, the bank board says that the FSLIC will have approximately $22 billion available to it over the next three years from premium income and from the borrowing authority given to it by Congress in 1987. Partially because the bank board has said that its funding is adequate, it is also simultaneously said that the insolvencies are limited primarily to the Southwest, particularly Texas. Although the Southwest is in the worst condition, the 1,000 deeply troubled thrifts exist throughout the country.
The two Orange County thrifts are prototypical of many that are in trouble. They were controlled and managed by inexperienced people, and in one case, fraud is allegedly a factor. They were allowed to grow rapidly and were left open after they were market-value insolvent. Gambling with FSLIC money, they took great risks. Their deterioration was rapid and irreversible, imposing huge costs on FSLIC.
Congress and the next President must realize that FSLIC’s current funding is woefully inadequate. The current strategy of taxing healthy thrifts for additional revenues is both inequitable and futile. Healthy thrifts did not cause the failure of other thrifts, and taxing them with additional insurance premiums threatens their income and net worth.
Congress can minimize the ultimate costs by making adequate funds available to the bank board so it can get control of the risk-taking of insolvent thrifts. The number of federal examiners and supervisors, for example, could double and still be too few and too inexperienced.
The program in which the two Orange County thrifts were among the 50 being managed under direct bank board control should be greatly expanded. Complaints about the program reflect the FSLIC’s lack of funding and, hence, its ability to close high rate-paying thrifts, not an inherent flaw in the program.
Inadequate FSLIC funding, too few closures and inadequate damage control spell higher future costs. The Orange County thrifts cost the FSLIC nearly 70 cents per dollar of assets in the thrifts. A recent Texas closure cost $2 billion, or 50 cents per dollar of assets. These costs are higher than the 1987 average of 35 cents per dollar of assets and may represent escalating costs.
News accounts of costly thrift closures in Orange County and in many other areas of the country between now and November, and the complete silence in the presidential campaign about the thrift and bank problem, will remind us that it is the most important unaddressed issue in the campaign.
