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Manhattan Beach Native Helping Bush Through S&L; Minefield

Times Staff Writer

You might say that Richard Breeden holds the hot seat in the White House.

As President Bush’s assistant for issue analysis, the 39-year-old Manhattan Beach native is going to be the White House’s leading trouble shooter, responsible for pulling together a plan for rescuing the troubled savings and loan industry.

And with the Bush Administration still reeling from the political firestorm that erupted this week against a Treasury Department proposal to boost fees on savings and bank deposits, the hot seat just got a lot hotter.

The first task facing Breeden will be to supervise a plan for the most sweeping reform of financial regulation in decades. With the nation facing a bill of between $50 billion and $100 billion to close hundreds of insolvent thrifts, the Administration’s ultimate goal is not only to clean up the mess but to restructure the industry so that it does not create a similar disaster again.

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“We allowed people to operate at the controls of thrifts, backed by federally insured deposits, with nothing at stake of their own,” he said in his first interview since entering the White House. “Since they knew they could walk away without any damage (to themselves), it’s no wonder they flew so many of them into the ground.”

To Breeden, a staunch believer in deregulation and free markets who wears yellow suspenders embellished with GOP elephants, no thrift should be allowed to operate without meeting the strictest financial standards.

What that means, Breeden readily acknowledges, is that the White House believes there should be no essential difference between the standards governing banks and thrifts. If savings institutions, which traditionally have enjoyed a host of special privileges from Congress and regulators, cannot operate under much stricter capital requirements and tough new accounting rules, they should be closed.

“If this President has anything to say about it,” Breeden says, “we’re never again going to let sentimentality get in the way of protecting the public treasury. In the future, if you operate with federally insured deposits and you ever violate the standards, we’re not going to wait. We’re going to close you down.”

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The root of the current problem, Breeden argues, is not that thrifts are no longer confined to home mortgages. Instead, regulators--under pressure from Congress--relaxed the minimum capital requirements and accounting standards in hopes that crippled S&Ls; eventually would recover from the Federal Reserve’s use of painfully high interest rates to crush runaway inflation in the early 1980s.

Thrifts also used their considerable political clout--particularly with such powerful Democrats as House Speaker Jim Wright of Texas and former House Banking, Finance and Urban Affairs Committee Chairman Fernand St Germain of Rhode Island--to deflect lawmakers from facing the crisis several years ago. At that time, closing down failed thrifts would have cost a lot less.

Breeden, however, does not think that it will be necessary to abolish the Federal Home Loan Bank Board, which both promotes and regulates federally insured savings institutions. It will not be necessary to give its supervisory responsibilities to the Federal Deposit Insurance Corp., which oversees banks.

While he suggests that he supports separating the board’s promotional efforts from its regulatory responsibilities held by the Federal Savings and Loan Insurance Corp., he says “there is fairly little to be gained by eliminating the Home Loan Bank Board. In recent years, they have developed a very high-quality staff.”

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For the moment, Breeden is still waiting for Treasury Secretary Nicholas F. Brady to deliver his recommendations to Bush on how to finance the thrift rescue effort. One option Brady was considering--to impose additional fees on bank and thrift deposits to pay for the cleanup--appears dead after a Washington Post story on the proposal touched off a storm of public criticism. Another idea--to place a 1% fee on new home mortgages--has also been shot down because of fears over a political backlash.

That leaves Bush with little choice but to place much of the cost of the bailout on taxpayers, forcing the Administration to rely primarily on direct budget expenditures. With Bush hemmed in by his “no new taxes” pledge, officials hope to minimize the impact on the federal deficit by creating special bonds in which repayment of the principal would be guaranteed by financial industry funds and the Treasury would cover just the annual interest costs.

Goes Beyond Problem

Breeden, a former law partner in the Washington office of Baker & Botts, a well-connected Texas firm, has advised Bush for years. He worked closely with the former vice president from 1982 to 1985 as the staff director on Bush’s regulatory reform task force and helped Bush during his campaign.

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A graduate of Stanford University and Harvard Law School, Breeden is highly knowledgeable about the financial questions involved in the S&L; crisis. But he points out that his role in the White House will extend well beyond the thrift cleanup.

“I’m not going to be involved in the regular development of policy,” he says. “My job is to pull together the best people from anywhere in the government whenever a special problem comes along.”

That should keep the workaholic Breeden busy. Indeed, his next task probably will be just as messy as his current one. “After this,” he says cheerfully, “we’re going to have to take a look at the nuclear weapons cleanup problem.”


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