Bush to Ask S&L; Bailout by Banks : Higher Deposit Premiums Would Raise Money for Insurance Fund

President Bush will call on banks to bear most of the financial burden of paying for the costly rescue of the federal insurance fund for savings and loan deposits, government and industry sources said Sunday.

Healthy S&Ls; would be expected to shoulder a smaller share of the cost.

Under a plan hammered out at the presidential retreat at Camp David, Md., over the weekend by Bush and his top financial advisers, the government would spend about $50 billion over three years to shut about 350 failing S&Ls; and pay off depositors, whose accounts are insured up to $100,000 each.

The plan, which Bush is expected to propose this week, would require congressional approval.

Industry Reforms Sought

Administration officials have said that Bush’s plan would also call for substantial reforms within the thrift industry designed to prevent a recurrence of the current crisis.

The Washington Post reported that the plan would place oversight of S&Ls; under the Treasury Department but would likely merge the administrative duties of the two agencies that insure funds at S&Ls; and banks.

The $50 billion would come from the sale of 30-year bonds by a federal financing agency, and taxpayers would pay interest on the bonds--probably about $5 billion a year once all the bonds were sold.

At the same time, an equal sum of money would be raised through additional premiums paid by banks and S&Ls; for their federal deposit insurance, to offset the bond interest payments on the federal budget. Thus, the Bush Administration will be able to assert that the taxpayers would not be bailing out insolvent savings institutions.

Most of the additional funds would come from the banks, which now pay 83 cents a year for each $1,000 in deposits for their deposit insurance. The proposed increase would bring banks’ premiums to $1.80 or $1.90, figures sure to provoke cries of outrage from the banking community, sources said.

The S&Ls;, which pay $2.08 per $1,000 in deposits, are likely to face a smaller increase, but officials did not indicate a specific level. “We’re going to bring banks up, but not as high as S&Ls;,” one knowledgeable official said.

Bank Outrage Described

“It’s gonna be a war,” predicted a banking industry official, who said banks are outraged at the idea of paying for a problem they did not create.

Some bankers had indicated privately that they would accept a lesser increase in their insurance premium than the Administration seems prepared to propose. A 50% increase, from 83 cents to $1.20, “might be acceptable,” an official of a major West Coast bank said. “But the further you get, the greater the level of opposition. A big increase will generate massive opposition from the industry.”

Anticipating these arguments, the Administration will tell the bankers that they would simply be paying higher premiums into their own insurance fund and not directly helping to alleviate the S&L; crisis. But the availability of the banks’ money would enable the Treasury Department to use other funds for the S&L; problem without worsening the budget deficit.

While the Bush Administration was putting the final touches on an S&L; rescue plan that would place most of the financial burden on banks, the chairman of the Senate Banking Committee said Sunday that taxpayer funds must be the “last resort.”

The government, Sen. Donald W. Riegle Jr. (D-Mich.) said on ABC’s “This Week With David Brinkley,” should “look within the industry for all of the financial help you can get.”

Riegle gave tentative support to the argument that industry competition will keep savings institutions from passing on any increased deposit insurance fees to consumers. This concept was advanced by another guest on the program, Preston Martin, former vice chairman of the Federal Reserve Board and an investor in California S&Ls.;

Martin said “there is no way” the increase could be passed along to customers of the institutions.

“The competition for savings in this country, particularly from Wall Street mutual funds, means that you drop your savings rate and the money leaves,” he said. And, he said, competition for mortgage business is stiff enough so that “if you change your mortgage rate, you won’t originate any mortgages.” If there is an increase, he said, “we absorb it ourselves.”

Budgeted Amount Cited

He noted that his group, which controls three S&Ls;, has budgeted $13 million for deposit insurance premiums payable to the Federal Savings and Loan Insurance Corp. but “may have to pay more.”

U.S. Comptroller General Charles A. Bowsher, who heads the congressional General Accounting Office, agreed that “there is a lot of pressure on the deposit rate” but predicted “a big effort” to pass on any increase in deposit insurance fees.

There was no support on the ABC program for the idea, originally floated by the Treasury, of charging depositors 25 cents for every $100 in deposits, which Riegle called “a non-starter.”

But Alan K. Simpson (R-Wyo.), the Senate’s minority whip, refused to rule out the deposit fee.

“You’ve got to put all sorts of things on the table,” Simpson said on NBC’s “Meet the Press.”

Riegle argued that an effort should be made to extract as much money as possible from the S&L; industry, especially in cases in which funds have been siphoned off through fraud, before the taxpayers are asked to finance a bailout plan.

Lending Reforms Sought

Bowsher strongly supported this approach but emphasized that reforms in lending practices should be put in place before taxpayer funds are committed.

Another guest on the ABC show, Edwin Gray, former chairman of the Federal Home Loan Bank Board, which regulates the savings industry, said the board had warned Congress “many times” of problems with the S&L; industry, recalling that he told the House Banking Committee in 1984 that “massive infusions” of Treasury funds “may well be necessary to shore up the system.”

Gray said “one of the big reasons” Congress failed to act “was that the powerful thrift lobby, with all of those contributions going to members of Congress, was stopping any action by the Congress to come to grips with it.”

Another panelist, Theo Pitt Jr., former chairman of the U.S. League of Savings Institutions, avoided direct comment on the charge. Instead, he called attention to congressional decisions, starting in the late 1970s, to deregulate interest rates and to “put us back in the position to be competitive because of the rapid run-up in interest rates.” He said the industry warned Congress several times and asked for authorization to offer adjustable rate mortgages.

If these requests had been granted, he said, “we wouldn’t be in the mess we’re in today.”