Tax Break to Buyers of Insolvent S&Ls; in ’88 Is $5.3 Billion, Panel Told
Federal regulators handed out $5.3 billion in tax breaks last year when they arranged the shutdown or sale of 205 crippled savings and loan associations, the House Budget Committee was told Thursday.
The Federal Home Loan Bank Board also disclosed that it is suing three major accounting firms for allegedly failing to uncover fraud and mismanagement at failing thrifts, factors believed to be playing a major role in the nation’s S&L; crisis.
The full cost of the year’s tax breaks, which are a key attraction for would-be buyers of insolvent S&Ls;, was disclosed for the first time by Lawrence White, a member of the Federal Home Loan Bank Board. The bank board regulates the 3,000 federally insured S&Ls; across the country.
White provided the number after persistent questioning by committee members who expressed concern about the impact of the S&L; crisis on the federal deficit. Congress must find a source of billions of additional dollars to make good on the federal guarantee on deposits of up to $100,000 in failing savings institutions.
$20 Billion in IOUs
The cost in 1988 included not only the tax breaks but also $20 billion in promissory notes issued by the bank board to protect the buyers of insolvent S&Ls; from suffering losses on the portfolios of real estate properties that have plunged in value.
But billions more are needed, committee members said Thursday, as they questioned White and the other two members of the bank board.
“There are a lot of frustrations here,” said Rep. Leon Panetta (D-Carmel), the committee chairman. “We will not allow the depositors to be hurt, but there is no blank check at the federal level.”
Committee members joined the Capitol Hill outcry that has virtually killed one fund-raising option being considered by the Bush Administration, a fee of 25 cents to 30 cents that would be charged to depositors for every $100 in deposits.
However, Wall reminded the committee that a source of funds must be found, whether the money comes from the S&L; industry itself, from all financial institutions or from the masses of taxpayers.
Because the insurance fund now contains just $3 billion in cash, the bank board has been forced to rely on promissory notes, guarantees and tax breaks to deal with the crippled S&Ls.; These arrangements commit to future spending of $32 billion to resolve the cases of 205 institutions.
Another 350 S&Ls; must be closed or sold, according to Wall. Panetta said the Congressional Budget Office and the President’s Office of Management and Budget estimate that the total cost of completing the task will be in the range of $64 billion to $68 billion. “That’s pretty fair, in terms of cash outlays,” Wall said in response to Panetta’s questions, promising a more specific figure next week.
The bank board has been steadily increasing its estimate of the cost of the problem as S&Ls; take massive writedowns on real estate projects financed during the Texas boom, before oil prices collapsed. Other government agencies and experts believe the ultimate cost will exceed $100 billion, far beyond what the S&L; industry can finance with the premiums it pays to the insurance fund.
i Most of the tax breaks offered last year by the bank board, $4 billion of the $5.3 billion, were included in the rush of deals arranged by the board during December. The value of the tax benefit was sharply reduced at year’s end.
The size of the benefit ultimately will depend on the future losses of the acquired S&Ls; and on the income earned by the firms that buy the S&Ls.;
Responding to inquiries about fraud at S&Ls;, Wall said the bank board has been aggressive in suing accounting firms, including three of the so-called Big 8 firms, for failure to detect financial misdeeds at the ailing institutions.
“The accounting profession is being identified as part of the problem,” Wall said.
The three major firms being sued, bank board officials said, are Deloitte Haskins & Sells, Coopers & Lybrand and Touche Ross & Co. Touche could not be reached for comment, Deloitte said it had no comment and Coopers said its audit of a failing thrift had been praised for finding problems.
Wall said his agency probably also will sue most of the other Big 8 firms.
Wall said some accounting firms may have engaged in criminal activity. A General Accounting Office report due to be released soon blames some major U.S. accounting firms for failing to find problems at savings and loan institutions that went bankrupt.
The GAO found instances in which the thrifts became insolvent soon after being audited by accounting firms that failed to turn up problems.
10 BIGGEST S&L; TAX BREAKS
These companies gained the biggest tax advantages by acquiring troubled savings and loans last year. In many instances, the firms may apply the tax deductions gained from the transaction against the earnings of any companies they control. The holding company MacAndrews & Forbes run by Ronald O. Perelman, for instance, can pass along a portion of its $897-million tax benefit to its Revlon Group subsidiary.
Acquiring Group Purchased Tax Benefit MacAndrews & Forbes 5 thrifts $897 million First Nationwide 6 thrifts 211 million Consolidated FSB Corp. 15 thrifts 234 million Bass Group American Savings 217 million Michigan National Beverly Hills Savings 87 million Golden West 2 thrifts 78 million Coast to Coast Lyons Federal S&L; 52 million Pacific USA 2 thrifts 50 million Centex Corp 4 thrifts 49 million Hyperion Partners United SA of Texas 32 million
Source: Federal Home Loan Bank Board
