FDIC Calls for Broad Changes in S & L Rules to Prevent Crises

The federal government should be allowed to stop insuring deposits at badly run savings and loan institutions, the nation’s top banking regulator said Wednesday as he estimated that taxpayers might have to contribute as much as $115 billion to rescue failed S&Ls.;

“The system must be changed if we are going to (continue to) have deposit insurance,” said L. William Seidman, chairman of the Federal Deposit Insurance Corp.

To avoid financial crises, the federal insurance fund for S&Ls; should operate like a private company, able to raise rates based on experience and to terminate coverage, Seidman told reporters, as his agency released a major study, “Deposit Insurance for the Nineties.”

He also called for more freedom for banks to enter new lines of business and to seek capital from other industries. Because S&Ls; already have this freedom, their advantage over banks “bastardizes” the nation’s financial system, Seidman said.

Special Hearing Sought

In another development Wednesday, House Banking Committee Chairman Henry B. Gonzalez (D-Tex.), angered by federal regulators’ “rush to close billions of dollars” in savings and loan rescue packages last month, said he will summon officials for a special investigative hearing.

“Numerous questions” have been raised about the hasty completion of deals in the last days of 1988 when special tax benefits were still available, Gonzalez said.

“We want you to be prepared to give the committee an estimate of the total tax benefits as well as a breakdown for each individual deal,” Gonzalez said in a letter to M. Danny Wall, chairman of the Federal Home Loan Bank Board. Seidman, meanwhile, said the S&L; insurance fund must be separate from the bank board, which has the mission of regulating the S&L; industry and promoting housing.

The nation needs independent “insurers whose primary interest is in maintaining a safe system and a safe insurance fund,” he said. “We believe when that gets mixed up with other duties, such as promoting housing . . . it tends to weaken the insurer’s resolve to protect his fund.”

The taxpayers will bear the heaviest burden of restoring the health of the S&L; insurance fund, Seidman said. As recently as November, he had suggested that the price tag might range from $50 billion to $100 billion. On Wednesday, however, he boosted the FDIC’s estimate to a range of $60 billion to $115 billion, the highest figures offered by any government official. The potential cost of the rescue keeps growing because the crippled S&Ls; suffer continuing losses each month. And there is little sign of recovery in the prices of depressed real estate properties held by financially ailing S&Ls; in Texas, where most of the losses are concentrated.

No Plan Endorsed

The Federal Savings and Loan Insurance Corp. protects deposits up to $100,000 at S&Ls;, just as Seidman’s FDIC guarantees bank deposits up to $100,000. The crisis has arisen because the FSLIC does not have enough cash to close the insolvent institutions and pay off the depositors. There is no threat to customers because Congress has previously declared that it will protect deposits with the “full faith and credit” of the United States. This declaration provides the security needed to avert any run on the S&Ls; by nervous depositors.

While depositors are reassured, Congress faces the difficult task of finding the billions of dollars needed to restore the insurance fund without worsening the federal budget deficit.

The FDIC study did not endorse a specific plan, although it said the budget impact could be minimized by some form of borrowing. A specially created agency could borrow the funds, with the Treasury guaranteeing the bonds issued by this agency and paying the interest. Only the interest would be counted against the budget deficit, the study said. One of Seidman’s predecessors as head of the FDIC, William Isaac, recently suggested the use of the healthy bank insurance fund to provide financial help for the beleaguered S&L; insurance fund. However, Seidman unequivocally rejects this idea. The FDIC’s cash “should not be used due to the risk of leaving the agency with insufficient funds to fulfill its function,” the FDIC report said.

‘Done Without Money’

Seidman believes that the S&L; problem is too massive to be solved by diverting funds from the bank insurance system or by calling on banks to pay additional insurance premiums to help the S&Ls.;

Offering a barbed compliment, Seidman said the Federal Home Loan Bank Board has become “the king of bailout agencies in the government.”

“We’re very happy to send Danny the congratulations and to note that he did it without money,” said Seidman, referring to the blizzard of year-end deals by Wall, the bank board chairman, to find outside investors for the crippled S&Ls.; The bank board relied on notes and guarantees against future losses to attract needed capital.

“I am green with envy looking at the buyers our friends up the street can get for their institutions,” Seidman said, referring to the barrage of December deals arranged by the Federal Home Loan Bank Board, whose offices are a block away from the FDIC headquarters.

Among the S&L; investors are a thrift unit of Ford Motor and Texas billionaire Robert M. Bass. Many would-be investors “cannot buy our banks because of rules separating commerce and banking,” Seidman said.

“I don’t think it makes any sense” to persist in separating banks and other businesses that would like to invest in banking, he said. Giving S&Ls; powers and investors denied to banks may help S&Ls; in the short run, but in the long run it “bastardizes” the financial system, Seidman said.

Total Value of Tax Benefits

The tax breaks given to buyers of the failed S&Ls; apparently “run into the billions of dollars,” said Rep. David Dreier (R-La Verne), a member of Gonzalez’s Banking Committee. “There was a small investment by a small group of people, helped by a huge infusion of tax dollars.”

The tax benefit of acquiring a loss-ridden S&L; was cut in half by changes in the tax law taking effect Jan. 1. The losses from the S&L; can be applied against other income to reduce the tax burden of the business investor acquiring the S&L.; But the changes in the law made it imperative to complete the deals before the end of 1988 to enjoy the maximum tax benefits.

Bank board officials said Wednesday that they had not completed calculating the total value of the tax benefits and the resulting loss to the U.S. Treasury. They refused to provide a general estimate of the cost.

The benefit varies with each transaction, depending on the losses of a particular S&L;, and the profits of the firm that buys the S&L.;

The tax breaks were important components in the complex packages assembled by bank board officials and outside investors during marathon negotiating sessions late in December. The bank board, which does not have enough cash in the federal insurance fund to close crippled S&Ls;, used notes and guarantees against future losses to attract outside investors to buy the S&Ls.;

Gonzalez said in the letter to Wall that the committee wants to know:

- The total cost to the insurance fund of all December transactions.

- The source of money to pay for these commitments.

- The capital furnished by each buyer.

- The cost of any alternatives to the aid packages and the “reasons for rejection of the alternatives.”