Proxmire to Ask $20 Billion for Bailout of S&Ls; : Reluctantly Decides That Taxpayers Must Foot Bill for U.S.’ Biggest Rescue
Sen. William Proxmire (D-Wis.), the penny-pinching chairman of the Senate Banking Committee, will urge Congress today to spend $20 billion in taxpayers’ money “to help clean up the mess in the savings and loan industry.”
In the text of a speech prepared for delivery on the Senate floor, Proxmire, who built his Senate career on careful and critical scrutiny of government spending, said he has decided reluctantly that only a federal rescue can save the industry.
“The bailout to come will be the largest ever in the history of the U.S.,” he said. “It will be far bigger than the combined cost of the assistance given, after intensive congressional scrutiny, to Chrysler, Lockheed and New York City.
“To make bad news even worse,” said Proxmire, who is retiring at year-end, “the longer the Congress waits to appropriate the money, the greater the ultimate cost will be to the nation’s taxpayers.”
For the rescue, Proxmire favors $20 billion in direct federal spending and wants healthy S&L; firms to put up an additional $30 billion. These massive sums would be used to shut hopelessly insolvent thrifts and pay off their depositors, and to help other marginal institutions attract outside buyers and merger partners.
The federal insurance fund for the savings industry already collects fees and premiums equal to about 20% of the profits earned by the healthy segment of the thrift industry. Federal regulators and Treasury Department officials argue that these fees are sufficient to handle the problems amassed by more than 500 insolvent institutions, where liabilities exceed assets.
The regulators have combined groups of money-losing S&Ls; to create bigger institutions, granting federal notes and guarantees to clean up the balance sheets, in hopes of attracting outside buyers.
‘Garbage Deals, Thrifts’
However, Proxmire said, this approach will not work indefinitely because the potential losses are too great at money-losing S&Ls.;
“The Administration prefers to pretend that the problem is manageable within the S&L; industry and will not require a taxpayer bailout,” he said. “To maintain this fiction, the regulators are engaging in sham resolutions. . . . These are garbage deals with garbage thrifts.”
Proxmire said the next Congress, of which he will not be a part, should:
Vote a direct appropriation of $20 billion to shut down the most hopeless S&Ls; as soon as possible and pay off their depositors. Federal insurance protects deposits up to $100,000.
Require that all thrifts bring their invested capital, the basic measurement of financial health, to the same level required of banks or else go out of business in three years. Many thrifts are financially much weaker than banks.
Remove federal deposit insurance from state-chartered thrifts that are allowed to make investments in relatively risky businesses. Those investments are forbidden to federally chartered S&Ls.;
Proxmire attacked what he called “the cozy regulatory relationship” between the Federal Home Loan Bank Board and the S&L; industry that it regulates. “Thrifts should be subject to the same capital, accounting and regulatory restrictions that we impose on commercial banks,” he said.
Proxmire’s staff said about one-third of the nation’s 3,000 S&Ls;, most of them in Texas, are hopelessly insolvent and should disappear through liquidations or mergers. Another one-third, they said, are very strong and will prosper without any outside help. The remaining one-third, they said, are in an uncertain middle position where they might be doomed but also might be able to build up their strength.
Losses Could Rise
Reagan Administration officials hope that the price of oil will rise and that the Texas real estate market will recover, thus boosting the prospects of the many troubled S&Ls; in Texas.
But that might be years away, and the thrifts’ losses might multiply in the meantime. So if Congress delays action on Proxmire’s plan or some other form of rescue, the losses from the crippled thrifts could continue to mount.
Immediate action, however, would put the burden on Congress to find the funds to rescue the S&Ls.; If Congress is to meet its deficit-reduction targets, Proxmire’s $20-billion bailout would require an equal amount in new taxes or $20 billion worth of spending cuts elsewhere in the budget.