Spending Plan Seeks $25 Billion to Close 100 Crippled S
In a change of strategy for dealing with the savings and loan crisis, President Reagan’s budget calls for spending $25 billion in two years to shut down at least 100 crippled S&Ls.;
Because the federal insurance fund does not have enough money to pay off all the depositors of foundering institutions, regulators have been furiously putting together deals to attract outside investors to buy them. So far they have avoided outright closings in all but a few cases.
But the new approach recognizes that the problem is so severe it ultimately would be cheaper to spend billions in cash and close the worst S&Ls.; Otherwise, insolvent institutions could continue to lose money at the rate of $12 billion to $15 billion a year, according to federal officials.
The $25 billion in the budget would be just the beginning of a rehabilitation effort that could require as much as $115 billion. That is the total estimated cost for dealing with ailing institutions and restoring the insurance fund to solvency.
A separate plan being drafted by the Treasury Department for resolving the crisis is expected to feature a bond issue that would raise large amounts of money but limit the direct budget impact to the interest payments on the bonds and other comparatively minor costs.
For example, a $100-billion bond issue could be managed with less than $15 billion counted as direct spending toward the federal budget deficit.
The Treasury will deliver its plan to President-elect Bush this month, Treasury Secretary Nicholas F. Brady said Monday. He declined to discuss details, but knowledgeable sources said that bonds would be used to raise large sums for closing down thrifts.
The budget unveiled Monday calls for spending $15.9 billion in fiscal 1989, and $9.1 billion in fiscal 1990. Those sums would permit the Federal Savings and Loan Insurance Corp. “to close at least 100 of the most unprofitable and insolvent institutions,” the budget document said. The budget calls for total outlays of $64 billion over six years.
“We put in the funds we felt were needed” for the current emergency, Budget Director Joseph Wright Jr. told reporters.
However, the budget section on “major policy initiatives” recognizes that much more spending may be required eventually, noting that “these proposals will not resolve the entire problem, nor will they address the fundamental deficiencies that have exacerbated . . . the current difficulties.”
Outside experts offered mixed reviews on the new approach. “The Administration is showing the signs of being willing to face this situation by coming up with the cash to close institutions down,” said Lowell Bryan, a director of McKinsey & Co., management consulting firm.
But S&L; consultant Bert Ely said the $25 billion mentioned will “only make a dent in the problem. It will continue to mushroom.” More institutions should be liquidated immediately or sold, he said. “You can’t get away from the fact that this is a cash-intensive process. You need to spend a lot more cash up front.”
The Bush Administration and Congress must develop a plan to replenish the federal insurance fund guaranteeing the safety of deposits up to $100,000. The promise of protection stands behind almost $900 billion in S&L; deposits and has averted consumer panics despite the insolvency of more than 500 S&Ls.; Congress will be pressed to decide how to distribute the burden of paying off the losses.