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Don’t Tap Fed to Rescue S&Ls;, Greenspan Says

Associated Press

Federal Reserve Board Chairman Alan Greenspan says the fund insuring savings and loan deposits needs more money, but requiring the Fed to help bail it out could “set a dangerous precedent.”

As savings institution losses have mounted, congressional debate has intensified over whether taxpayers must pay to bail out the Federal Savings and Loan Insurance Corp., and over alternatives to tax money.

The Federal Home Loan Bank Board, which regulates S&Ls; and oversees the insurance fund, maintains that the assessment levied on the industry can cover the costs.

But many analysts, and now Greenspan, agree that the insurance fund’s current flow of revenue isn’t enough.

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“Clearly the FSLIC will need additional resources,” Greenspan said in a statement released Wednesday by the Senate Banking Committee.

But he added that any move to tap the Fed for money “would mark a sharp departure from the view traditionally held in our nation that the resources of the Federal Reserve . . . should not be used for special purposes and would set a dangerous precedent for the future.”

Lender of Last Resort

He also said “funding from the Federal Reserve would add to the federal budget deficit essentially in the same way as a budget expenditure.”

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The Fed, as the nation’s central bank, uses its funds to control inflation in the economy, intervene in foreign exchange markets and act as a lender of last resort during financial crises such as the October, 1987, stock market crash.

Greenspan’s remarks, made in a statement dated Oct. 17, were offered in response to questions, submitted July 29 by the banking committee, on a wide range of subjects.

Sen. Donald W. Riegle Jr. (D.-Mich.), who is expected to become chairman of the committee next year, asked Greenspan about a proposal to require the Fed to pay interest on reserves it holds from U.S. commercial banks and channel the money to the FSLIC. Another suggestion would require the Fed to accept as collateral for loans FSLIC notes issued to ailing S&Ls.;

Greenspan offered no solution to the S&L; crisis but said his agency would express its views when Congress takes up the topic. In the meantime, he said the Federal Reserve banks would act as a lender of last resort to S&Ls; in trouble if the Federal Home Loan Bank system cannot.

Government estimates have put the cost of restoring the S&L; industry to solvency at $45 billion to $50 billion, with private analysts setting the cost at up to $100 billion.

Greenspan said “great uncertainty” surrounds estimates of S&L; losses because “relatively small changes” in the value of real estate securing loans to troubled institutions “can have a major impact on the magnitude of thrift industry losses.”


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