There’s Nothing Under S&L; Shells : Bush Plan May Sound Ambitious, but Numbers Don’t Add Up

The Bush Administration is up to the same old shell game with its plan for the savings and loan industry.

The Administration’s projection for the total cost of the S&L; bailout is $126 billion over the next 10 years. About $60 billion is the taxpayer tab, while the thrift industry will miraculously pay the remainder.

But when you blow away the smoke, the numbers don’t add up. Watch closely now and guess which shell houses the coveted future stream of income to the Federal Savings and Loan Insurance Commission, the key financial ingredient of the Bush plan. Shell No. 1 is $38 billion is commitments made by FSLIC during the end-of-the-year megarescues of ailing thrifts. Shell No. 2 is the principal payment on $50 billion in new bonds. Shell No. 3 is interest on these bonds, to be paid mainly by the taxpayer but also in part by the thrifts. Shell No. 4 is an “insurance fund for healthy S&Ls;” that the Treasury says will be created with future FSLIC premiums. Under the Bush plan, this income stream is catering four parties scheduled for the same hour--at opposite ends of town.

The promise of reform turns out to be another empty shell. The Bush plan’s “never again” proposals are status quo Band-Aids on a bankrupt structure of federal deposit insurance.

First, the finances. The Administration proposes to float $50 billion in new bonds, with the thrifts paying the principal. A “modest” $5 billion-$6 billion investment in zero-coupon Treasury bonds will yield the needed $50 billion upon their maturity about 30 years from now. This investment is supposed to come from the thrift industry--retained earnings of the Federal Home Loan Banks, funds from the disposal of assets received from insolvent S&Ls;, and future deposit insurance premiums.

But those retained earnings total only $2.2 billion. Comptroller General Charles Bowsher says that last year’s sweetheart rescue deals will require all of FSLIC’s income stream for the next 10 years, plus a further $26 billion. And all of this presumes the best of all possible worlds: low inflation, declining interest rates, no new claims against federal deposit insurance funds, and naive investors not demanding risk premiums on bonds that lack full faith and credit.

Then there’s the unbudgeted costs of the future failures brought on by the Administration’s proposal to require that thrifts double their capital reserves within two years. This will put over the brink many of the 400 thrifts just scraping by now.

And from whence will all this new capital come anyway? Who in their right mind is going to put capital into thrift equities or bonds?

Finally, we have vague promises of a new, consolidated insurance agency for thrifts and banks and “stricter standards for granting insurance.” But how strict can a system be that charges one uniform price to all recipients for insurance and, upon insolvency, bails out various uninsured parties--namely uninsured depositors and general creditors? In other words, the liabilities of U.S. taxpayers as deposit insurers not only total $2.7 trillion (deposits up to $100,000 in banks, thrifts and credit unions), but current regulatory practices leave taxpayers hostage to the guarantee of all $4 trillion deposited in federally insured institutions.

If this costly burden of de facto 100% deposit insurance is not bad enough, depository institutions--the good and bad alike--will, simply by growing, continue to expand taxpayers’ liabilities. Mismanaged institutions will continue to write hot checks on the taxpayers’ account.

What does the Administration propose to do about this? Not a thing.

Yet the solution to this unlimited line of credit on the taxpayer is simple: Cap the federal trough. Nearly $3 trillion is subsidy enough. The Administration can cap taxpayer liabilities and allocate that sum to insured institutions, based on their present deposit base. This federal insurance would be made tradeable. Institutions desiring to grow would have to either purchase federal insurance in the market, or phase in private deposit insurance.

As private insurance enters at the margin, market signals would be introduced, and with them a transparent process that would make it more difficult for regulators to forbear in utilizing their regulatory tools.

So Washington politicians are breathing a sign of relief. They don’t have to crack the tough nut--deposit insurance reform--and face up to their complicity in politically manipulated regulation that inevitably played fast and loose with underfinanced taxpayer guarantees.

The Bush plan reforms leave us no comfort but to hope that regulators will get it right next time. But they have had numerous regulatory guns all along that they never took out of their holsters. Dressing up federal deposit insurance in new clothes with proclamations of “never again” still offers only more hair of the dog that bit us.