S&L; Bailout Cost Could Explode, Experts Warn
The escalating cost of the nation’s savings and loan rescues, which now stands at nearly $39 billion, is but a rough guess that may surge dramatically in the years ahead if the economy worsens, banking experts warn.
Marked rises in interest rates, or a further deterioration of oil-dependent areas like Texas, could balloon these bailout costs for the Federal Home Loan Bank Board and its insurance arm, the Federal Savings and Loan Insurance Corp.
At a time when Congress is being asked to pump in billions in taxpayer dollars, questions are being raised not only about the ultimate cost of the government taking over bad loans, but also about the additional cost of the lucrative tax breaks being handed to companies like Ford Motor Co. that are rescuing bad thrifts.
“When FSLIC comes up with a number, they are just guessing,” said one established banking consultant, who asked not to be identified.
For example, he said, the FSLIC’s estimated rescue cost of $1.7 billion for Stockton-based American Savings & Loan, announced late last month, is “incredibly optimistic. I could see the cost going to $3 billion without too much difficulty.”
Such comments help explain why the Federal Home Loan Bank Board and its chairman, M. Danny Wall, now have a large credibility problem with Congress and Wall Street. Many lawmakers and financial analysts believe that the bank board misleads the public by underestimating the ultimate cost of cleaning up the thrift industry’s problems.
Banking Committee Hearing
On Tuesday, a hearing by the House Banking Committee in Washington is expected to be a forum for congressional criticism of the bank board’s bailout policies, and regulators are expected to strongly defend their actions.
“The thing that bothers me is they’re criticizing us and they have not even examined the deals yet,” bank board member Roger Martin complained.
Although the bank board has pledged nearly $39 billion in the rescue effort and hundreds of other thrifts remain insolvent, the board’s official estimate of the total cleanup cost remains at $50 billion. Most other private and government estimates are at least 50% higher.
As a result, nearly all experts now believe that the FSLIC, an industry-funded government agency, will ultimately need tax dollars to meet these obligations.
“The bank board (members) as a source of estimates have discredited themselves about as well as they could,” said Jonathan Gray, analyst for Sanford C. Bernstein & Co. in New York.
The board also remains under heavy fire for the manner in which it handled a final flurry of thrift rescues late in 1988. A total of 217 thrifts were bailed out last year, including 70 in December alone that cost $16.6 billion.
Some lawmakers are troubled because they say these deals provide wealthy buyers with huge potential windfalls in the form of tax breaks. They warn that the bailouts will cost the U.S. Treasury billions of dollars in lost taxes at a time when the federal budget deficit is the toughest issue facing the new Congress.
Rich corporations, such as Ford Motor Co., and wealthy private investors, including Texan Robert M. Bass, bought thrifts in late December before a year-end change in the law halved the tax benefits involved.
“I don’t think people realize how much in tax benefits you can obtain,” said Alan Kaden, attorney in the Washington law office of Fried, Frank, Harris, Shriver & Jacobson.
The acquirers get tax breaks on past losses. And, according to Veribanc, a financial consulting firm in Woburn, Mass., the 217 thrifts bailed out in 1988 lost $17.2 billion in the last three years.
Of that, $7.28 billion came in operating losses, according to Veribanc, which compiled the numbers at the request of The Times. The rest of the red ink came largely from write-offs on problem loans.
Under certain circumstances, buyers of failed thrifts may use past operating losses as deductions. Then, most important, there is the assistance from the FSLIC, which can run as high as several billion dollars per rescue over a 10-year period. For all of the rescues completed by the end of 1988, this assistance is tax free.
A typical FSLIC bailout usually includes cash or interest-bearing notes to shore up a failed thrift’s net worth, and a future pledge of cash to take care of problem assets. The FSLIC agrees to cover the losses on assets while they are managed and sold.
Particularly lucrative tax-wise is the so-called capital-loss coverage, in which the FSLIC agrees to reimburse a thrift for losses on a problem asset when it is sold. These losses are often huge and offer potentially huge deductions.
American Savings is a case in point. The thrift was bought last month by private investors led by Bass, a billionaire from Ft. Worth with a reputation as a savvy buyout artist.
American Savings has lost so much money in recent years that it has built up tax deductions of significantly more than $1 billion--deductions that may now be applied to American Savings’ future earnings. The deductions could save as much as $700 million in taxes during the next several years, according to one internal American Savings estimate.
But putting the public spotlight on arcane matters of tax law has lead to considerable misunderstanding and disagreements because, regulators say, it is not a simple matter of fat-cat investors getting windfalls at the expense of the U.S. taxpayer.
Regulators and acquirers point out that it is the FSLIC--not the buyers--that stands to reap the lion’s share of the tax benefits. In the American Savings case, for instance, the FSLIC stands to receive 75% of the tax breaks, and Bass will receive the rest.
Sen. Timothy E. Wirth (D-Colo.) charged recently that Ford Motor stood to harvest nearly $4 billion in tax benefits from a $400-million investment in failed thrifts by its financial subsidiary, First Nationwide Financial.
But officials at First Nationwide fumed, saying Wirth did not have his facts straight. “The number is nowhere near what he was talking about,” said Robert E. Lackovic, chief executive at San Francisco-based First Nationwide. “It’s in the millions, not billions.”
Wirth was in South America late last week and could not be reached for comment on how he arrived at that number. Nor could his staff explain how the number was calculated.
Others point out that Congress created the tax law in 1981 as a way of luring new capital into the industry. And the lure has worked, say regulators, who point out that private investors pumped nearly $700 million in new capital into the hard-hit Texas thrift industry in December alone.
But critics say the bank board downplays the true cost of the overall problem because it does not publicize what might happen in worst-case situations. Industry experts say the board’s bailout estimates are based on a scenario of stable interest rates, not what would happen if rates rise sharply.
