GAO Says S&L; Industry Crisis Will Cost $85 Million to Resolve

In the gloomiest prediction yet about the savings and loan crisis, the General Accounting Office said Wednesday that the government will need a staggering $85 billion over the next 10 years to pay off the depositors of failed S & Ls and restore the health of the federal insurance fund.

The healthy S & Ls “should pay as much of the cost as possible,” but a massive taxpayer bailout will be the major source of funds, along with possible contributions from banks, credit unions and other providers of financial services, the GAO said.

As much as $75 billion to $80 billion “may have to come” from the taxpayers unless banks and others “are required to share the cost,” the GAO said.

It is “futile and costly” for federal regulators and members of Congress to believe that troubled S & Ls can be kept open “in the hope that the fortunes of these institutions would reverse themselves,” the GAO said in a special report on the S & L crisis requested by several members of Congress.

The crippled S & Ls should be placed into receivership--in effect seized by federal regulators--so they can be quickly shut down or sold, the report says.

The GAO’s report carries special weight because the agency is the official auditor of the Federal Savings & Loan Insurance Corp., which protects S & L deposits up to $100,000.

The estimates for solving the S & L crisis have been steadily escalating in recent months, with the GAO itself offering a figure of $50 billion-plus in a review in September of the status of the insurance fund. L. William Seidman, chairman of the Federal Deposit Insurance Corp., which protects commercial bank deposits up to $100,000, said recently that the cost could range between $50 billion and $100 billion. And some industry analysts have suggested that the price tag could go well beyond $100 billion.

However, Wednesday’s report offers much more depth and significance because the GAO has gone beyond its conventional review of the insurance fund’s numbers and is offering for the first time a detailed blueprint for restoring the health of the deposit insurance system. The GAO is the investigative arm of Congress, and its 220-page report will be given much more recognition than any other analysis.

“This report will be a blueprint for reform when Congress tackles the FSLIC bankruptcy next year,” said Rep. Gerald D. Klecza (D-Wis.), one of four members of Congress who requested the report.

“It is the first solid analysis from an independent government agency with hard numbers and real proposals for resolution of the deposit insurance crisis,” Klecza said.

Congress will begin debate next year on the best way to revive the insurance fund while minimizing the cost of the rescue to the taxpayers.

Although the insurance fund is running in the red, consumers can be confident that their deposits up to $100,000 will be safe. Congress has pledged the full faith and credit of the United States for the backing of insured deposits. This means that the insurance protection will remain in place regardless of what happens to individual S & Ls while the federal insurance system is being revived or modified.

When an S & L is shut down, regulators from the Federal Home Loan Bank Board take control and quickly issue checks for deposits up to $100,000.

Because the insurance fund is virtually broke, regulators are unable to shut down more than 500 insolvent S & Ls, which have liabilities in excess of their assets. The regulators have been combining groups of weak institutions, hoping that the mergers will cut costs and will attract outside investors with capital badly needed to restore the S & Ls to health.

But the GAO believes that this strategy will not work. The weak institutions, which must pay above-average interest rates to attract deposits, continue to “hemorrhage” financially, losing more than $1 billion a month, according to GAO officials.

Quick action is needed to shut down the ailing S & Ls because losses can only grow with time, the agency’s report contends. Rep. Henry B. Gonzalez (D-Tex.), chairman of the House Banking Committee, agreed, saying: “As I have been trying to point out since April, every day that goes by, the hole gets bigger.” Gonzalez has proposed a $50-billion loan from the Treasury to the FSLIC, with the funds earmarked for shutting down the most badly damaged institutions.

The GAO noted that, “unfortunately, no one knows precisely how much it will cost to restore FSLIC to financial health.” If action is taken quickly, and if interest rates stay at current levels, the report says, “FSLIC will need at least $85 billion more than the funding it anticipates receiving over the next 10 years.”

The insurance fund gets its money from premiums paid by the healthy S & Ls. However, the profitable thrifts cannot carry the burden--about 25% of their profits are being consumed by premiums paid to the insurance fund.

There are 2,590 healthy S & Ls, which had earnings of $800 million during the third quarter of this year. However, their profits were overwhelmed by the losses of $2.4 billion at 434 insolvent S & Ls, most of which are located in Texas. The decline in oil prices and the collapse of the Texas real estate market left S & Ls with portfolios of real estate on which they are suffering huge losses.

Spread the Burden

The GAO said the regulators will need $50 billion to pay off depositors, $10 billion to pay interest on additional funds that must be borrowed, $5 billion for unanticipated losses and $20 billion to create an adequate insurance reserve, for a total of $85 billion.

If other financial industry sources, such as banks and credit unions, are tapped for help in this emergency, the “contribution should be spread as widely as possible to minimize the burden of individual contributions and to avoid placing some sectors of the industry at a competitive disadvantage,” the GAO said.

The banking industry would fight very hard against any congressional efforts to force its members to pay for a bailout of their rivals in the S & L industry. Commercial banks are enjoying their best year ever, with FDIC, the banks’ insurer, reporting record profits for the industry of $5.9 billion during the third quarter.