Treasury Official, Congressmen Clash Over S&L; Bailouts
Treasury Undersecretary George D. Gould, clashing with members of the House Banking Committee, said Thursday that financial regulators’ use of $10 billion in notes to prop up failing savings and loan associations is supported by the full faith and credit of the United States.
“It was never the intent of Congress to give an open checkbook to any federal agency,” responded an angry Rep. Toby Roth (R-Wis.).
Some members fear that the 10-year notes, which enable regulators to rescue S&Ls; without any immediate outlays of cash from the federal insurance fund, are simply a device to postpone a taxpayer bailout for the beleaguered financial institutions.
However, Gould declared that the notes issued by the Federal Home Loan Bank Board for S&L; rescues have the same sacrosanct status as deposits, which are insured up to $100,000.
Despite critical questioning, Gould gave a vote of confidence to the Federal Home Loan Bank Board’s handling of the crisis, saying Congress should leave the regulators alone for a year to concentrate on rescuing S&Ls.; He rejected suggestions that general tax revenues will be needed to close S&Lsand; pay off depositors.
“The worst thing is to throw a lot of tax money at the problem,” he said.
However, several members of the committee disagreed sharply, attacking the bank board’s policies in dealing with the general problem of S&L; insolvency--in particular the proposed sale of American Savings & Loan, based in Stockton, to Texas billionaire Robert M. Bass.
“We want Mr. Bass to come and testify; he’s being given a lot of funding here,” said Rep. Fernand J. St Germain (D-R.I.), the committee chairman.
The deal allows the Bass Group to establish a merchant bank, which would have access to $1.5 billion in American S&L; funds available for outside investment. To the lawmakers, it seems like an undue bargain for the Bass Group, which brings $550 million in new capital to a reconstituted American Savings.
“This is the first time in the history of the system that federal dollars are going in, but federal control is going out,” said Rep. Jim Leach (R-Iowa), noting that American will be regulated under California rules, which are much more permissive than federal regulations in allowing outside investments.
Bass Publicity Shy
Defending the deal, however, bank board Chairman M. Danny Wall said the Bass Group’s merchant bank will be strictly regulated. It cannot be involved in hostile corporate takeovers, real estate development, gambling activities or any foreign investments. It also would be prohibited from investing in precious metals and commodities futures and options, according to an agreement between federal regulators and the Bass Group.
Bass will put $50 million into the merchant bank, which must remain solvent and cannot pay any dividends unless the parent American Savings is in good financial health.
The publicity-shy Bass has been calling committee members, saying he does not want to testify, St Germain said. He added, “I’m going to press the matter.”
Rep. Richard H. Lehman (D-Sanger), whose district includes the Stockton headquarters of American Savings, tried unsuccessfully to dissuade St Germain. “We have 2,000 employees there, and these are very delicate negotiations, still not finished,” Lehman said.
But St Germain was insistent on his plans to summon Bass to testify at a future hearing. “When we were asked to assist New York, the mayor of New York and the governor came,” he said.
The American Savings acquisition depends on a complex federal aid package, including a $500-million note and $1.5 billion in an assistance agreement.
Burdens Cleaned Up
Altogether, the bank board has issued $10.2 billion in notes, which in effect are IOUs by the agency, and another $6.9 billion in assistance agreements, which are pledges by the regulators to make good on losses from loans gone bad, often on failed real estate and energy projects.
The notes and assistance agreements clean up the burdens on S&L; balance sheets, making the thrift institutions attractive to buyers who will contribute capital, the regulators hope. Standing behind the notes and agreements are the assessments and dues collected by the bank board each year from healthy S&Ls.;
By issuing notes, the regulators avoid dipping into the cash reserves.
This strategy “seems to be nothing more than a massive shell game,” complained Rep. Charles E. Schumer (D-N.Y.). Many S&Ls; “will ultimately have to be bailed out again at even greater cost to the taxpayer,” he said.
Rep. Doug Barnard Jr. (D-Ga.) said, “We must face the possibility of a taxpayer bailout, maybe next year, or the year after next.”
Rep. Stan Parris (R-Va.) said the unrestricted use of notes to help the S&Ls; is like “giving my kids a credit card.”
Both Gould and Wall defended the notes as the least costly method for saving crippled S&Ls.; Shutting down all of the nation’s troubled thrifts and paying off depositors would cost $125 billion, Gould said.
Despite Gould’s insistence that the notes are fully supported by the nation’s credit, Wall said he still wants a congressional resolution saying the same thing in order to reassure prospective buyers of S&Ls.; “The accountants want it; let’s give them more confidence,” he said.
