Panel to Question Wall’s Use of Notes to Rescue Thrifts
M. Danny Wall, chairman of the Federal Home Loan Bank Board, is a man who loves to write notes--not little “thank you” messages but formal promises to pay big bucks to ailing savings and loan associations.
Wall’s agency has already poured out $9.7 billion in notes to strengthen the balance sheets of insolvent S&Ls;, and on Monday it promised another $500 million as a key element in its complex rescue plan for American Savings & Loan, the nation’s second-largest thrift.
These notes are IOUs by the federal regulators, and key members of Congress are increasingly worried about the cost of making good on these promises, which may total $16 billion by 1992.
A skeptical House Banking Committee will hold hearings today to question Wall closely about the bank board’s use of notes and about American Savings.
Key Part of Strategy
Rep. Fernand St Germain (D-R.I.), the committee chairman, says he fears that the notes are a technique to keep thrifts going without revealing to Congress the “true depth” of the industry’s financial woes.
Meanwhile, Wall is rushing to pump out the IOUs as fast as he can. “I’ve got two monkeys on my back,” he said frankly, referring to calendar deadlines.
The full face value of any notes issued after Oct. 1, when the new federal budget year begins, will be counted as part of the federal budget deficit for the first time. Previously, only the interest and principal paid each year were tallied in the budget. And any notes issued after Dec. 31 will not qualify for the current favorable tax treatment.
The bank board told budget officials that its issuance of notes in the next fiscal year will increase the federal deficit by $4.6 billion. That is a hefty sum at a time when Congress, worried about years of massive deficits, is striving to slow the growth of federal spending.
In the rush to beat the Oct. 1 deadline, the bank board may issue as much as $2 billion in notes this month. “It depends how quickly we can act on the pending deals,” bank board spokesman William Fulwider said.
Wall has whirled through a veritable blizzard of rescues in the past few weeks, arranging government aid packages and notes for selling, merging or shutting 46 beleaguered S&Ls.; The most notable deal involves American Savings, the biggest patient on the bank board’s long list of financially ailing institutions. A $2-billion aid package, which includes a note for $500 million, plays a central role in the planned sale of American to Texas billionaire Robert M. Bass, who will put $550 million in new capital into American Savings.
The notes are IOUs issued by the Federal Savings and Loan Insurance Corp., the agency which insures S&L; deposits up to $100,000. FSLIC makes the annual interest payment but does not have to pay the face value of the note until the end of its term. Notes may run five or 10 years, depending on the terms of the specific assistance agreement.
Critics Take Issue
Regulators like the notes because they do not have to be paid off for years and because they avoid the necessity of dipping into the FSLIC insurance fund for the full amount. This enables the regulators, with just a small amount of cash in the insurance fund, to prepare billions of dollars in rescue packages for troubled S&Ls.;
The notes are valuable to the troubled S&Ls; because the notes can be used to bolster the institution’s financial health.
An insolvent institution has liabilities exceeding assets, making it unattractive to potential buyers. The notes issued by the federal regulators count as positive assets and overcome the negative impact of loans and investments that went bad.
This effectively eliminates the institution’s negative net worth and gives the buyer a thrift with a clean balance sheet.
However, critics say that often notes are simply stringing out the collapse of the troubled S&Ls;, particularly in those cases where there are no buyers to put in new money.
In two major deals last month, the regulators used notes for the consolidation of eight Texas thrifts into a reconstituted Sunbelt Savings and for the grouping of 14 Oklahoma thrifts into six surviving S&Ls.; The thrifts will remain in business while the managers close branches, trim payrolls and combine departments in a drive to save money and attract buyers.
“In the Sun Belt, for example, they consolidated eight small problems into one big problem,” said Bert Ely, a financial consultant and S&L; expert who will testify before the House committee today. “I have to question whether these are good transactions.
“The bank board is saying its judgment is better than the marketplace, and that’s a ludicrous assumption to make. You don’t see healthy thrifts from California and elsewhere, or banks, coming in to buy these institutions,” Ely added. “If the price is right, buyers will come in. But the bank board is trying to do deals on the cheap, not willing to put enough direct assistance on the table.”
‘Full Faith and Credit’
However, the bank board is insistent on minimizing the direct cash outlays for fear of jeopardizing the insurance fund when so many cases of insolvent S&Ls; remain. Wall and the other regulators insist that grouping sick S&Ls; together, buttressed by the notes, will buy enough time to stem the financial losses. Then the revamped institutions will be able to attract buyers, the regulators say.
This strategy depends heavily on the use of notes, and Wall wants Congress to put the nation’s full financial backing behind the notes, just as Congress declared that the “full faith and credit” of the Treasury stands behind S&L; deposits up to $100,000.
The Senate approved such an amendment, but it was killed last month in a House-Senate conference at the insistence of Rep. St Germain. His committee registered its “strongest opposition” to the Senate proposal, according to St Germain. He fears that it would give the bank board officials the power to spend virtually as much as they want through the use of notes to prop up sick S&Ls; without any accounting to Congress.
St Germain is openly distrustful of Wall because of the rising estimate of the costs of cleaning up the crippled segment of the thrift industry. “In Chairman Wall’s most recent appearance before the Banking Committee, he provided the members with yet another new estimate of the depth of the . . . problem,” St Germain said in a letter to Rep. Jamie L. Whitten (D-Miss.), chairman of the House Appropriations Committee.
Questions Raised
After receiving St Germain’s strong protest, Whitten, leader of the House conferees, rejected the Senate plan to give full Treasury backing to the notes.
“Giving a pledge of full faith and credit is like getting a rich uncle to co-sign for the debts of the wayward nephew,” financial consultant Ely said. FSLIC, which officially issues the notes, is “the nephew, and the uncle is us, the taxpayer,” Ely said.
Some accounting firms have raised questions about the value of the notes if they are not fully backed by the government. Negotiations for Ford Motor Co. to acquire the insolvent American Savings of Stockton collapsed earlier this year after Ford’s accountants expressed doubts about the ultimate value of the notes that would have been a key part of the deal.
But the S&L; industry joins forces with Wall in seeking unqualified backing for the notes. “It doesn’t make sense to have any agency in the business of guaranteeing deposits if its own paper does not carry a government guarantee,” said Mark F. Clark, senior vice president for public affairs of the U.S. League of Savings Institutions.
Without the pledge of backing by the full faith and credit of the United States, the notes will be less attractive to potential buyers of S&Ls;, and a higher interest rate will be required, Wall said.
The argument will intensify today when Wall and St Germain face each other at the banking committee hearing: Are Danny Wall’s notes part of a “financial shell game,” as Ely says, or are they a vital, legitimate device to attract new investors and capital to the beleaguered thrift industry?
