Treasury Seeks to Split Tasks of S&L; Regulator

The Treasury Department is preparing to recommend that the savings and loan insurance fund be separated from its parent organization to tighten supervision of the industry, government and banking sources said Friday.

Under the current system, the Federal Home Loan Bank Board is responsible for promoting and regulating the industry and for insuring deposits through its Federal Savings & Loan Insurance Corp. arm.

Many financial analysts contend that regulation of the troubled industry has been sapped in part because the two roles are combined under the bank board.

Sources said the Treasury plan will include much tougher measures designed to require savings institutions to increase their capital resources, particularly for non-mortgage loans. The measures would also allow federal regulators to take temporary custody of an undercapitalized institution if a legal challenge was filed to an agency decision to enforce its minimum capital rules.

It is unclear whether the Treasury Department also plans to advocate merging the FSLIC with the similar insurance fund for banks, the Federal Deposit Insurance Corp.

The Wall Street Journal reported Friday that Treasury officials working on the thrift industry bailout proposal were close to proposing that FSLIC be merged with the FDIC, a move that would completely restructure oversight of the thrift industry.

Treasury Secretary Nicholas F. Brady has said he will deliver the department’s proposals for rescuing and revamping the thrift industry to President-elect George Bush around the time he takes office. Bush will be inaugurated Jan. 20.

John Sununu, who will be White House chief of staff, said Friday that Bush expects to receive a number of possible options for dealing with the saving and loan crisis from Treasury officials rather than one specific plan for the industry.

“At the earliest stage of presentation from Treasury,” Sununu said at a lunch with Times reporters and editors here, “there will be alternatives. . . . I suspect, knowing his (Bush’s) style, he’ll indicate some preferences for some of the fundamental approaches of the alternatives and then probably have Treasury go back and work something out in response to the constraints he’s defined.”

Huge Rescue Operation

Sununu added that he then would expect Treasury officials to “come back with a recommended package based on the druthers that he’s expressed.”

Sununu also made clear that officials of the incoming Administration are focusing as much attention on making major changes in the thrift industry as they are on the financing package that will be offered to bail out depositors of insolvent savings institutions.

“The reform is as important as the pressing issue of providing the funds to take care of the depositors,” he said.

The Treasury’s proposal will include plans aimed at paying for the massive rescue of failed thrifts, which is estimated to cost as much as $115 billion. The industry, through its insurance premiums, probably can contribute no more than $30 billion toward any rescue operation, officials said. To protect the nation’s financial system, which is backed by federal promises to protect thrift depositors from losses up to $100,000, the rest of the cost will inevitably end up being paid for by taxpayers.

The Treasury plan is expected to recommend a scheme designed to prevent the immediate cost of any bailout from being reflected in the federal budget deficit. To keep the rescue operation from hampering the incoming Administration’s efforts to reach the $100 billion Gramm-Rudman deficit target for next year, officials are looking at the idea of issuing special bonds. Under this approach, only interest payments would have to be made by the Treasury.

But because such bonds would not be fully backed by the U.S. government, they would carry a higher interest rate than normal Treasury bonds and could add as much as $500 million a year to the cost of the rescue operation.

Outgoing White House Budget Director Joseph R. Wright Jr. has urged the Treasury to avoid that type of solution, but he told reporters earlier this week that he was not confident Treasury officials would follow his advice.

Regulators in California are angry at being stripped of responsibility for Lincoln S&L.; Page 2