S&Ls; May Have Outlived Need, Greenspan Says : But Members of Congress Express Strong Support for Separate Lending Industry

Federal Reserve Board Chairman Alan Greenspan said Thursday that the nation may no longer need a separate savings and loan industry, but members of Congress staunchly defended S&Ls; as vital suppliers of money for home mortgages.

Greenspan, who is the first official of his stature to suggest that S&Ls; may have outlived their usefulness, told the Senate Banking Committee that he doubts “whether specialized fixed-rate residential lending institutions are needed today.”

“Ultimately it’s going to be the markets that are going to determine the banking structure in this country,” he said.

On the House side of the Capitol, meanwhile, banking committee Chairman Rep. Henry B. Gonzalez (D-Tex.) said: “I did not become chairman of this committee to preside over the liquidation of the savings and loan industry.

“I am a strong advocate of the industry,” said Gonzalez, as his House committee gave a hostile reception to a Bush Administration plan to solve the S&L; financial crisis through the possible liquidation or sale of hundreds of S&Ls; within the next two years.

In an immediate step to calm nervous depositors, officials said Thursday that the Federal Reserve will provide reserves of cash to stem any rush by depositors to withdraw funds from S&Ls.; There was an unusually heavy outflow of funds, $15 billion, in the last two months of last year.

Will Supply Cash

The President and members of Congress have repeatedly pledged that the full backing of the government stands behind S&L; deposits, which are insured up to $100,000. However, the drumbeat of publicity about the financial crisis of the federal fund that insures thrift deposits continues to cause widespread concern. This prompted an announcement Thursday that the Federal Reserve, the Treasury and the Federal Home Loan Banks will all cooperate in supplying the cash needs of S&Ls.;

“We stand ready to make certain the liquidity needs of the thrift institutions are met,” Greenspan said.

Although Treasury Secretary Nicholas F. Brady insisted repeatedly Thursday that the S&L; industry would emerge stronger from President Bush’s proposed rescue package, House banking committee members are fearful that the Administration would be happy to see S&Ls; disappear into the banking system.

“Rather than heal the wounds of this industry, your plan may put it out of its misery,” Rep. Richard H. Lehman (D-Sanger) told Brady at the House Banking Committee hearing.

At the same time, Fed Chairman Greenspan told the Senate Banking Committee that S&Ls; may have outlived their usefulness.

There have been “important changes in the mortgage market” he said, which may make it “unnecessary to provide special government-subsidized facilities for mortgage lending.” Home loans, once offered on a strictly local basis, are now bundled into packages and sold as securities throughout the country.

Promotes Home Ownership

The Fed chairman said his agency plans to make it easier for bank holding companies to acquire troubled thrifts, another move that should help wipe out much of the traditional distinction between banks and S&Ls.;

The S&L; financing system was created during the Depression to promote home ownership. Previously, lending institutions offered loans running for just a few years and required a large portion of the full purchase price as a down payment. Federal legislation made possible the Home Loan Bank system, owned by the S&L; industry, which made available a steady stream of funds for mortgages.

At the same time, the Federal Savings and Loan Insurance Corp. was created to insure deposits up to $100,000. S&Ls; made most home loans until the industry was deregulated in the early 1980s, but after that mortgage bankers and other institutions actively entered the market on a large scale.

A new price tag for the S&L; rescue plan, $175.4 billion over 30 years, was issued Thursday by the Administration, following criticisms in Congress that the total cost had not been accurately disclosed. The Office of Management and Budget said previously that the plan would cost $126 billion over 10 years, including interest payments on the bonds to pay for S&L; liquidations and sales. The bonds have a 30-year life, and Thursday’s new total of $175.4 billion reflects the full interest cost. The taxpayers will be responsible for $89.2 billion of interest payments on the bonds.

Assume Higher Rates

However, members of Congress offer conflicting tallies. Sen. John Heinz (R-Pa.), a member of the Banking Committee, believes the program will cost $200 billion, with about $110 billion of that paid by taxpayers. A House Banking Committee analysis puts the cost at $335 billion, with $183 billion coming from the taxpayers.

The congressional figures are higher because they assume much higher interest rates, which drive up the ultimate cost of the bonds. Congress also is more pessimistic than the Administration about the amount of money that will be recovered through the sale of homes, apartments, office buildings and other properties taken by the government from failed institutions.

A key provision of the plan, aimed at preventing a future collapse of S&Ls;, would require the thrifts to increase their financial strength substantially. Only 1,200 of the 2,500 solvent S&Ls; now have enough capital to meet the standards that would be required by 1991 if the Bush plan is approved by Congress.

Rep. Thomas J. Ridge (R-Pa.) suggested that S&Ls; falling below the capital standards, but showing improvement, should be given additional time beyond 1991 to meet the requirement.

The Treasury secretary was polite but adamant in his refusal. “With all due respect, we feel very strongly we ought to adhere to the 1991 deadlines,” he said. “Our feeling is the requirement could be met, and you will have a strong industry.”

Banks, which are generally stronger financially, would be able to buy weaker S&Ls; and will “become the beneficiaries of all this,” complained Lehman, referring to the Administration plan.

Congress Suspicious

Brady responded: “We have no intention whatsoever to deliver up the S&L; industry to the banking industry.”

However, many members of Congress fear that that is precisely the Administration’s secret goal.

Chairman Gonzalez, and Rep. Frank Annunzio (D-Ill.), whose subcommittee will write the S&L; legislation, will fight hard against what they perceive as efforts to dismantle the S&L; industry or convert thrifts into banks.

“I support a separate home lending industry in this country, and I will oppose any attempt to do away with such an industry,” Annunzio said.