At a Time for Outrage on S&Ls; and Takeovers, the Silence Is Deafening

The savings-and-loan scandal and the multibillion-dollar takeover binge prove one thing: The American people have lost their capacity for outrage.

The S&L; situation is now shaping up as the biggest financial disaster of the post-World War II era. Of 3,000 U.S. savings-and-loans, nearly 1,000 are losing money and half of these are insolvent. Congressional investigators say that fraud or criminal conduct figures in 75% of the insolvencies.

Thanks to federal deposit insurance, smaller depositors won’t lose any money. But the bail-out of the thrift industry is expected to cost $50 billion to $100 billion, making the federal rescue loans to Lockheed and Chrysler chicken feed by comparison.

An estimated $20 billion of S&L; bail-out costs, and possibly much more, will haveto come from the pockets of taxpayers.

To the degree that S&Ls; and perhaps commercial banks are made to pay the tab in the form of higher deposit-insurance premiums, the result will also be more upward pressure on borrowing costs--and higher prices to home buyers and consumers.

Although unsound lending practices and venal S&L; managers are at the heart of the debacle, it could have happened only in the prevailing environment of deregulation run amok and congressional complacency.

When the Federal Reserve pushed up interest rates to tame inflation a decade ago, previously healthy thrifts found themselves stymied by a ceiling on how much interest they could pay to depositors, who began to move their money where they could earn more.

Congress responded by removing the interest-rate ceiling on deposits. Soon the S&Ls; were paying more for deposits than they were collecting on old, fixed-rate loans.

So in 1982 Congress allowed the thrifts to invest in office buildings and other commercial ventures. The Federal Home Loan Bank Board, meanwhile, relaxed accounting rules and capital requirements.

All this attracted a new breed of fast-buck artists into the savings-and-loan business--especially in Texas, California and Florida--who proceeded to make loans on everything from office buildings to race tracks and fish farms, with scant regard for economic soundness.

In many cases S&L; owners siphoned off money into their own pockets. To quote a California regulatory official, “The best way to rob a bank is to own one.”

When insolvencies multiplied and bank board officials belatedly tried to impose stricter rules, they got no help from the deregulation-minded Reagan Administration. For a long time, influential congressmen, including House Speaker Jim Wright, a Democrat, actually opposed a crackdown.

The problem finally became too big to ignore. The Federal Savings and Loan Insurance Corp., which itself is broke, has committed $25 billion to consolidating or merging 114 thrifts and closing 21 others. The final bill will be much, much higher, and regulatory reform, plus restructuring of the banking business, is clearly required.

The need for action seems obvious. But the issue has barely been mentioned in the presidential campaign. And the candidates have come under no real public pressureto declare themselves.

The same elements of private greed and government inaction are now present in the corporate-takeover craze, which contains the ingredients of a financial collapse.

The newspapers have been full of stories about Philip Morris’ $13.1-billion forced acquisition of Kraft, Inc., and a $20.3-billion offer for RJR Nabisco.

Hundreds of takeovers have occurred in the last few years. The experts now say that not even a company like General Motors is big enough to be safe from an unwanted leveraged buyout, or LBO.

In LBOs the buyer offers above-market prices to stockholders in order to gain approval. To finance the deal, the predators borrow money by selling junk bonds to banks, insurance companies and pension plans attracted by higher returns.

To pay off the huge debt once the deal is made, a merged company typically sells off parts of the business, reduces the work force and cuts expenditures for research and development.

There may be cases in which the result is a better, more competitive company. But, if so, it’s usually incidental.

As a veteran of the takeover wars wrote in the Wall Street Journal, “Most of this is happening for the short-term benefit of Wall Street’s investment bankers, lawyers, leveraged-buyout firms and junk-bond dealers at the long-term expense of Main Street’s employees, communities, companies and investors.”

The Federal Reserve worries that if a serious recession came, many firms would be unable to pay these artificially incurred debts, bringing on widespread bankruptcies, even bank failures, and dealing a severe blow to the retirement prospects of millions of pension-plan members.

Even some members of the business and financial communities call the merger craze an “obscene” threat to the future of the American economy, and favor restraints on lending by banks and pension funds for LBOs.

But, again, the Administration sees and hears no evil, congressional reaction has been timid--and the silence from the presidential campaigns has been deafening.

Whatever happened to old-fashioned outrage?