General Accounting Office Warns of Taxpayer Bailout of Nation’s Failing Thrifts
In its most alarming forecast yet about the sick segment of the savings and loan industry, the General Accounting Office said Thursday that taxpayers inevitably will be called upon to pay the costs of merging, selling or shutting hundreds of insolvent S&Ls.;
“This is going to be far beyond what we as a government have ever had to do,” Frederick D. Wolf, director of accounting and financial management for the GAO, told angry members of the House Banking, Finance and Urban Affairs Committee.
The cost of rescuing the failing thrifts could be $45 billion to $55 billion and may run even higher, Wolf said. This is far beyond the current estimate of $30.9 billion by the Federal Home Loan Bank Board, which regulates the nation’s 3,100 federally chartered S&Ls.;
Although the bank board is expected to increase its own estimate soon, its officials still insist that the fees they collect from healthy S&Ls; will be adequate to close or merge the sick ones and protect insured deposits.
The GAO, Congress’ investigative arm, agreed with that assessment as recently as May, when it called the bank board’s estimate too optimistic but said the board might be able to manage the crisis without resorting to a bailout by taxpayers.
On Thursday, however, the GAO became the first government agency to assert flatly that taxpayers would have to pay for rescuing the S&L; industry. Wolf stated that the costs of dealing with sick thrifts had ballooned so far beyond previous estimates that there was no source other than the taxpayers who could foot the bill.
S&Ls; Pay Fees
“Things are worse than anybody anticipated,” Wolf said. “If we put the whole load on the backs of the healthy S&Ls;, they aren’t going to make it.”
The Federal Savings and Loan Insurance Corp., which protects S&L; deposits up to $100,000, collects fees and premiums from the healthy S&Ls.; The assessments now equal about 25% of the industry’s profits, and Wolf said even that was not enough to pay off depositors of terminally ill S&Ls; or to cover the bad loans of unhealthy but salvageable thrifts.
He noted that it cost $1.25 billion just to close “two hole-in-the-wall S&Ls;”--North American Savings & Loan and American Diversified Savings Bank in Orange County--and make good on insured deposits. “That cost us more than Penn Square, Lockheed, New York City and other things about which we had national debates,” he added, referring to cases in which the federal government provided financial help.
Federal regulators, seeking to avoid depleting the cash they have raised from their fees and premiums from healthy S&Ls;, have resorted to other means to help bail out failing S&Ls.; They have issued notes, which are IOUs on the funds raised from the industry, and signed assistance agreements, which are guarantees to make up any losses suffered by investors who buy the failing institutions.
But those techniques drew criticism Thursday from House Banking Committee members. Chairman Fernand J. St Germain (D-R.I.) expressed fears that the notes and agreements “are only shell games to postpone the inevitable.”
After hearing Wolf’s testimony, St Germain and some other committee members expressed anger at the bank board regulators but seemed to accept the inevitability of a bailout.
Question of ‘When, How’
“It is too late to say there shall be no taxpayer bailout,” said Rep. Henry B. Gonzalez (D-Tex.). “It is now a question of when and how.”
Rep. Stan Parris (R-Va.) said the cost of resolving the crisis could reach $70 billion and argued that the bank board had resorted to assistance agreements “to obfuscate the cost . . . and make us all feel warm and cozy.”
Bank board chairman M. Danny Wall, in a speech to the American Institute of Certified Public Accountants, acknowledged Thursday that the cost of dealing with the S&L; crisis was rising, but he declined to provide a specific new figure until the board issues a new estimate as scheduled at month’s end.
“We have said the estimate will be higher,” Wall said. “Losses continue to be recognized.”
About 500 of the nation’s S&Ls; are in such deep trouble that their losses far exceed the profits of the 2,600 healthy institutions. Most of the sick thrifts are in Texas, where falling oil prices, a weak real estate market and some mismanagement and fraud have combined to produce a financial disaster.
PRICE OF BAILING OUT INSOLVENT SAVINGS & LOANS Here are varying estimates of the cost of handling the nation’s insolvent savings and loan associations.
Date: July 16, 1987 Source: Federal Deposit Insurance Corp. internal working paper Estimate: $40 billion Date: May 19, 1988 Source: General Accounting Office Estimate: $26-$36 billion Date: May 19, 1988 Source: Stanley C. Silverberg, former head of research at FDIC Estimate: “$50 billion and growing” Date: Date unavailable Source: Bert Ely, S&L; industry consultant Estimate: $64 billion Date: July 7, 1987 Source: M. Danny Wall, chairman, Federal Home Loan Bank Board Estimate: $30.9 billion Date: Aug. 3, 1988 Source: George D. Gould, undersecretary of the Treasury Estimate: $30-$50 billion Date: Aug. 4, 1988 Source: L. William Seidman, chairman, FDIC Estimate: about $50 billion Date: Sept. 15, 1988 Source: General Accounting Office Estimate: $45-$50 billion
