S&L; Regulators ‘Robbed Blind,’ Lawmakers Say
House Banking Committee members, notified by federal regulators Tuesday that the year-end flurry of savings and loan rescues would cost $4 billion in federal tax breaks on top of a potential $16 billion in government guarantees against future losses, castigated the regulators Tuesday for what they charged was a gigantic giveaway of federal funds.
The investors who bought the S&Ls; “have robbed you blind,” an angry Rep. Jim Leach (R-Iowa) told M. Danny Wall, chairman of the Federal Home Loan Bank Board.
Wall snapped back: “That’s absolutely incorrect--I can’t let that stand.”
Fund Almost Broke
He staunchly defended the sale of 75 crippled S&Ls; last month as the only choice he had, because the federal insurance fund was virtually broke. It would have cost $23 billion to close the 75 institutions and pay off depositors, he said, but the insurance fund contained just $3 billion.
Wall and the committee members traded verbal barbs for more than four hours as the lawmakers began coming to grips with the inevitability of the biggest government financial bailout in history. Honoring the federal insurance guarantee for S&L; deposits of up to $100,000 will cost anywhere from $60 billion to $115 billion, according to informed estimates.
The taxpayers will bear the major burden of rescuing the insurance fund.
Rep. Charles E. Schumer (D-N.Y.) said the S&L; bailout had already eclipsed the total of the federal loan guarantees made to bail out Chrysler Corp., Lockheed Corp. and New York City, plus the tab for the Marshall Plan of grants and loans to rebuild Europe after World War II.
(Those four endeavors involved a total of about $17 billion in actual dollars. Adjusted for inflation, that figure would be much higher. In 1987 dollars, for example, the Marshall Plan alone would have cost $60 billion.)
The bank board has already made commitments of nearly $40 billion, including its rescues last month, and still has more than 400 insolvent institutions to close or sell.
Defending the bank board’s year-end rush to dispose of S&Ls;, member Lawrence White told the committee that this “is not a bailout for stockholders, owners or managers.”
“We are not bailing out thrifts,” he said. “We are honoring our obligation to depositors. We told them their money is good (despite) . . . looting, pillaging or bad business judgment.”
The federal insurance fund must fill in a giant financial “hole,” making good the insolvency of hundreds of crippled S&Ls;, White said. Billions of dollars collected in deposits were lent for real estate projects that went bad, especially in Texas, where property and land values collapsed.
But committee critics said the bank board’s rush to dispose of the most troubled S&Ls; resulted in a virtual giveaway. To attract buyers, the bank board last month provided $16 billion in notes and guarantees that protect the buyers against any losses from the S&Ls; they have acquired.
“This allows the rich to get richer,” Rep. Leach complained. “If it works, the investor makes a killing. If not, they walk away. It’s a backdoor raid on the Treasury. Like jackals, they can pick over the bones.”
The deals were hastened to completion by year’s end because the value of tax losses from the insolvent S&Ls; was cut by half on Jan. 1.
In handling the S&L; crisis, the bank board is exercising vast powers to spend money, Rep. Henry B. Gonzalez (D-Tex.), the committee chairman, noted. Not even the President may commit the federal government to spending money without congressional approval, he said.
However, the three appointed members of the bank board, without authorization from Congress, “can go behind closed doors, enter into deals with individuals and corporations, give away tax benefits and commit the federal government to guarantees reaching long into the future,” Gonzalez said.
Schumer was particularly critical of the bank board’s deal with the Utley Ford group, an aggregation of investors including Revlon Chairman Ronald O. Perelman.
The investors bought a group of five ailing S&Ls; for $315 million. They received tax benefits worth $897 million. Those tax losses from the S&Ls; can be applied against the profits from the investors’ other businesses, including Revlon, to reduce taxes on the profitable enterprises, Schumer said.
First Nationwide, the S&L; subsidiary of Ford Motor Co., provided $204 million in capital to acquire troubled S&Ls.; It received tax benefits worth $211 million, which can be applied against Ford Motor earnings, according to Banking Committee sources.
The Robert M. Bass group will furnish $500 million in capital for American Savings and will receive tax benefits worth $217 million, which, under terms of the takeover agreement, can be applied only against the earnings of American Savings.
In disposing of more than 200 troubled S&Ls; this year, primarily through sales and mergers, the bank board has attracted investment capital totaling $3 billion. At the same time, said Leach, it has given the investors tax benefits estimated at $8 billion.
The investors are “deal makers who walk away with more cash than they put in on day one--they are laughing all the way to the piggy bank,” Leach said.
Wall insisted that the regulators had no alternative.
“We made the assessment (to sell) in a sober and serious vein,” he said.
Lockheed Loan Guarantee (1971): $250 million
Chrysler Loan Guarantee (1980): $1.5 billion
New York City Loan Guarantee (1978): $1.65 billion
Marshall Plan foreign aid grants and loans (1948-52): $13.3 billion
Total cost of savings and loan bailouts, estimated $60 billion to $115 billion