Bush’s S&L; Plan, Target of Much Criticism, May Get an Overhaul
Several government-arranged rescues of ailing savings and loans, criticized heavily by Congress as potentially too costly to taxpayers, may be restructured under the Bush Administration’s thrift bailout package, industry and regulatory officials said Wednesday.
Meanwhile, California S&L; officials sharply criticized provisions of the package, including one that could more than triple the cost of deposit insurance premiums paid by thrifts.
“Very few thrifts in the country can afford to pay that kind of premium,” said Kim Fletcher, chairman and chief executive of Home Federal Savings & Loan in San Diego. Bush Administration officials “are fooling themselves,” he said.
Industry executives also took aim at provisions to increase the required capital--which includes the amount available to cover bad loans--that thrifts must carry on their books.
The comments, which came one day after the Treasury Department released full details of its proposed thrift bailout package, raised doubts about whether the package can survive intact in Congress. The plan, expected to cost more than the $90-billion price tag used by the Bush Administration, calls for at least 224 insolvent thrifts to be taken over in coming weeks, among other things.
However, one aspect of the plan that may be somewhat less controversial calls for creation of a Resolution Trust Corp. to review and possibly restructure already completed bailouts to reduce their costs to the government.
Regulators insisted on Wednesday that the proposed agency--to be created and managed by the Federal Deposit Insurance Corp.--would not unilaterally renege on deals struck last year. Federal regulators granted generous concessions to arrange the acquisitions of dozens of insolvent thrifts, mostly in Texas and California. The Federal Home Loan Bank Board, chief regulator of thrifts, arranged 179 such acquisitions last year, involving $38 billion in concessions and some $8 billion in tax breaks.
Looking at All Deals
But the proposed agency could work within existing terms of the takeover agreements to change their structure and reduce costs.
For example, in many of those takeovers, buyers were given promissory notes--promises by the government to pay money--to increase the capital strength of the ailing thrifts. The buyers are earning interest on those notes, usually tax-free.
But many of the promissory notes have “call” provisions enabling the government to pay off the notes in part or in full. The new agency may wish to do this if it believes that it can refinance the notes at a lower rate. Or, it may feel that such a threat could cause some buyers to renegotiate the entire deal, since buyers may have difficulty reinvesting the money from the paid-off notes at rates as profitable as those they are receiving from the government.
Industry experts said the deals most likely to be reexamined involve thrifts in Texas, where problems were most severe, due in part to bad real estate and energy loans. Granting of tax benefits and other concessions were most pronounced there, analysts say.
Industry experts specifically cited the takeover of five large Texas institutions by an investment group led by Revlon Chairman Ronald O. Perelman. The government agreed to provide $5.1 billion in aid over 10 years, while the private investors would inject $315 million. Perelman, analysts say, clearly will gain from tax benefits provided by the deal.
A spokesman for the S&L; created by the merger of those five Texas S&Ls;, First Gibraltar Bank, called Perelman’s deal “fair” but added that “we of course will play by whatever deals are set.”
Some California deals may be reexamined as well. Industry experts suggested Michigan National Corp.’s takeover of Beverly Hills Savings & Loan, with $983 million of government assistance against $52 million in new capital from the Michigan banking firm.
However, pursuing any of these options would require cash that must be raised as part of the bailout package. And some industry experts suggested that the government may be reluctant to commit funds to renegotiating already completed takeovers when there are still dozens of other ailing thrifts that must be taken over or closed with government assistance.
“There are bigger problems out there to deal with,” said Richard Kneipper, a Dallas attorney who negotiated several thrift takeovers last year.
Plan Is ‘Unthinkable’
Meanwhile, California thrift executives objected to several controversial provisions in the Bush plan. Drawing the most fire was a plan that could hike deposit insurance premiums paid by S&Ls; to as high as 75 cents for each $100 in deposits, up from 20.8 cents now.
Roger K. Lindland, president of Great American Savings & Loan in San Diego, called the plan “unthinkable.” He said, “We already pay a very high premium.”
Thrift executives don’t want to pay more for their insurance than commercial banks, which are covered by the healthier FDIC. Under the Bush plan, insurance premiums paid by banks would rise to 15 cents by 1991--less than S&Ls; now pay.
Another part of the Bush plan calls for thrifts to dramatically increase their capital, or double the amount of money they have to back up their loans, in two years. Although many thrift executives agreed it was necessary, they said they wanted more time.
Norman Coulson, president of Glendale Federal, said the proposal would probably lead to a spate of mergers as thrifts seek to increase their capital by increasing their size. He said other thrifts might make fewer loans, or, at least, grow more slowly.
Coulson said Glendale Federal has intentionally slowed the growth of its lending business to meet the more rigorous capital requirements.
The Bush plan could torpedo efforts by California thrifts to withdraw from the Federal Savings and Loan Insurance Corp., the troubled organization that insures thrift deposits. The Bush plan says no thrifts can leave FSLIC for five years, and then only after paying an as yet undetermined “exit fee” that would compensate FSLIC for lost insurance premiums.
