Thrift Crisis Could Produce a Sequel : Bush Bailout Plan Rests on Shaky Assumptions, Analysts Say
If you think the Bush Administration’s “Savings and Loan I: The Bailout Plan” is too expensive and horrifying for comfort, wait until you see the sequel--”S&L; II: The Reality”--three or four years from now.
Critics of the Administration’s bailout proposal say that for all its deft packaging, it is so seriously flawed internally that the S&L; crisis is almost certain to come back to haunt us, possibly as early as 1991.
The Administration, analysts contend, has simply not provided enough money to solve the problem, either in its $40-billion rescue of insolvent S&Ls; that were sold off last year or in its plan to sell $50 billion in bonds to bail out the failed S&Ls; that remain open. And the next time, they warn, only the taxpayer will be available to come to the rescue.
Bert Ely, whose Alexandria, Va., consulting firm specializes in thrift industry problems, predicts that the cost of the S&L; bailout will ultimately prove to be about $20 billion higher than the Administration projects.
And Ned Eichler, a San Francisco consultant, predicts that the tab for the federal rescue “will probably end up in the $150-billion range”--assuming that authorities can still move quickly enough to stave off further losses from operating but insolvent S&Ls.;
With both banks and S&Ls; already heavily burdened, “very little of that can be paid by the banking system,” Eichler added. That means virtually all of the extra expense will have to be paid by the taxpayers, he said, with added consequences for the federal budget.
The critics doubt that the hasty selloffs of insolvent S&Ls; engineered by the Federal Home Loan Bank Board late last year will hold together for very long--raising the possibility that regulators will have to repeat their rescue efforts. That could add billions of dollars to the ultimate cost.
“It’s a nightmare that’s almost certain to recur,” said Eichler, who has closely watched the S&L; situation for years.
And as for the Bush Administration’s planned $50-billion bond sale to solve the remaining problem, economists believe that it is built upon a series of implausible economic projections. When reality falls short of the projections, they say, taxpayer costs of funding the bond sale, now estimated at $40 billion over the next 10 years, will mount.
In particular, analysts criticize these Administration forecasts:
- That interest rates will fall over the three-year period during which the government sells the $50 billion in bonds.
- That deposits will increase at a healthy rate at banks and S&Ls;, thus increasing government revenue from its deposit insurance fee.
- That the government will reap a hefty return by selling the buildings and equipment of the failed S&Ls; that it closes or sells to outside buyers.
Assumption: Interest Rates Will Decline
The Administration, which proposes to sell $15 billion in 30-year bonds this year, $25 billion next year and $10 billion in 1991, calculated the interest costs on the assumption that interest rates would average 7.4%.
But Paul Horvitz, a University of Houston finance professor, points out that long-term interest rates are now more than 9% and seem to be going higher, not lower. Even if they merely held steady, that would add billions to the interest costs as projected by the Administration.
“We’re going to have a big hit as the interest rates that currently exist work through the system,” Horvitz said.
A related point: S&Ls; typically borrow funds short term and lend long term, in mortgages. But under today’s peculiar market conditions, short-term rates are higher than long-term rates. Horvitz predicts that the spread in rates will grow, and a spike in short-term interest rates could push even more shaky savings institutions into the drink.
Eric I. Hemel, a vice president of First Boston Corp., asked: “What happens to new losses? That’s not addressed in the Administration’s current program.”
Assumption: S&L; Deposits Will Grow
The Administration contends that the government during the next 10 years can raise $31 billion toward the overall cost of the S&L; bailout from the higher premiums it proposes to charge for insuring S&L; deposits of up to $100,000. Its projections assume that the volume of these deposits will increase by a robust 7.2% a year between now and 1999.
But analysts point out that depositors have begun fleeing S&Ls;, both because they fear that savings institutions might go under and because they can get higher rates of return by investing in money market accounts. Under current conditions, they are not likely to return.
Melanie Tammen, an analyst with the Competitive Enterprise Institute, a Washington-based research group, calls the projection for a 7.2% increase in deposit levels “ludicrous.” Funds “already are pouring out of the thrifts,” she said. “There’s no growth at all.”
Eichler adds that another feature of the Bush bailout plan--a requirement that S&Ls; maintain capital reserves equal to 6% of their assets by 1991, double the current level--would force savings institutions to contract. S&Ls; could not raise enough new capital to double their reserves, he says, and so they could meet the new requirement only by reducing their loan portfolios.
“If you make that assumption, the whole revenue projection that the government is making is cockeyed,” Eichler asserts. “The income stream is going to be far less than it is now.”
Assumption: Lucrative Asset Sales
In addition to the $31 billion in new revenue from deposit insurance premiums, the Administration is counting on raising $26 billion by selling buildings and equipment from the S&Ls; that it either shuts down or puts up for acquisition by outside buyers. The figures are based on the estimated book value of S&Ls;’ assets.
But Eichler contends that the sum these assets are likely to draw during liquidation “is nowhere near their book value.”
And Horvitz argues that virtually all the troubled S&Ls; already have pledged their assets as collateral in return for earlier cash advances from the Federal Home Loan Bank Board. So there would be no profit from selling them.
As a result, Tammen predicts that there will be “controversies over setting a fair price--with politicians and other interests not wanting to get into the fire sale. That’s not a liquidation at all,” she says.
Another wild card is the tax consequences of the bailout plan. The Administration has projected that the tax writeoffs that banks can claim as a result of the higher premiums they will be charged will drain $5.3 billion between fiscal 1989 and fiscal 1999. But federal officials concede that the estimates are shaky and could go higher.
As if the budgetary impact of the proposed new bailout were not difficult enough to forecast, analysts still have questions about the ultimate cost of the S&L; closures and sales that the Federal Home Loan Bank Board engineered late last year.
The bank board, faced with end-of-year expiration of the tax breaks needed to lure would-be buyers, offered buyers generous terms that included federal guarantees against losses of their own. Many failing S&Ls; were bought by entrepreneurs who had no experience in the thrift industry.
The General Accounting Office is still analyzing the end-of-year deals. But analysts already say there is a fairly good chance that many of the new S&L; owners will become disenchanted--particularly with the new, higher capital requirements--and will want to sell.
The Administration’s newly proposed S&L; bailout package would provide new authority for federal authorities to renegotiate the 1988 deals where practical. Although the aim is to save money, the government might have to pay more if some of the S&L; deals completed last year should collapse.
Robert E. Litan, a Brookings Institution economist, worries that the Administration’s optimistic estimates could backfire.
“If they asked for a lot of borrowing authority now, they could always go back later and say, ‘Hey, we can do it more cheaply than we thought,’ ” Litan said. “But they’re taking a big political risk if they have to go back and ask for more.”
