Real Cost of S&L; Bailout Depends on ‘What If ?’

Pick a number, any number--the larger the better--and it has probably been cited as the cost of President Bush’s S&L; bailout plan.

In the beginning, there was the $90-billion estimate presented by the Administration when it announced the plan early this month. That represents the total cost of paying off all the depositors in roughly 200 savings and loan associations that were shut down by the federal government last year and perhaps 350 more that are still operating but currently insolvent.

Then the fun began. Numbers started flying: $126 billion, $157 billion, $200 billion, and, soaring into the stratosphere, $335 billion.

In hopes of sorting out some of the confusion, here are answers to several questions about the costs of the S&L; bailout.

Q: So what’s the bottom line for taxpayers?

A: Nobody really knows. It all depends on what economic assumptions are used. If interest rates are higher than the Administration expects over the next three years, if the assets owned by insolvent S&Ls; are worth less than predicted and if surviving thrift institutions do not attract as many deposits as forecast, the government will have to come up with more money to cover its losses.

Relying on its own assumptions, the White House estimated that the Treasury will have to fork over $39.9 billion during the next 10 years to finance the bailout. That’s money that taxpayers must pay, either through higher taxes or by reduced spending on other government programs. The rest of the cash is supposed to come from banking and thrift industry sources.

Many critics, questioning the White House assumptions, have challenged the Bush estimates as inadequate. They’re probably right. That’s a problem federal budget planners will have to face.

Q: What will the money be spent on?

A: Last year, when the federal government took over more than 200 failed thrifts, there was not enough money in the federal insurance fund to pay off all their depositors. So the government issued huge promissory notes and handed out billions in tax breaks to lure outside investors into taking the institutions off its hands. Although the government has not disclosed details of most of those deals, it estimates the net cost of all of them at about $40 billion.

Another $50 billion is required over the next three years, the Administration believes, to take over more than 350 S&Ls; that are currently operating even though they are insolvent, which means that their assets are worth less than their liabilities.

Q: Where will the money come from?

A: Surviving thrifts would keep paying into the existing deposit insurance fund to help finance past and future expenses, and their premiums are supposed to increase as well. Some additional asset sales would also raise money.

But over the next 10 years, the White House estimates, taxpayers will have to contribute $37.9 billion, primarily to meet the cost of last year’s bailouts, to keep the federal savings insurance fund intact.

Q: But what about the additional $50 billion the Administration says it needs to raise?

A: That will cost taxpayers an additional $22 billion in the next 10 years. But getting there is complicated.

The government plans on issuing $50 billion in special bonds over the next three years to finance the bailouts of the remaining insolvent thrifts.

To pay off the $50 billion when the bonds come due in 30 years, the government would buy “zero-coupon” bonds. Those bonds, which pay interest only in a lump sum when they mature, would require an up-front payment from the thrift industry of about $5 billion.

Somebody would also have to pay the annual interest on the $50 billion in bonds--about $3.8 billion a year, according to the Treasury’s optimistic estimate. Some of the money is supposed to come from selling the assets of the bankrupt S&Ls.; Some would come from the regional Federal Home Loan Banks, which earn interest on the money that all S&Ls; are required to keep on deposit there. The rest would be paid by the Treasury--that is, by the taxpayers.

Over the first 10 years, total interest is estimated at $36.4 billion, of which taxpayers are expected to pay $22 billion.

Q: That sounds like a total cost to taxpayers of $59.9 billion.

A: That’s right. But at the same time, about $20 billion in higher deposit insurance premiums would be collected from banks as part of the bailout package. Because that money flows into government coffers, helping to generate offsetting receipts, it reduces net federal outlays. That is supposed to leave a bottom line to taxpayers of $39.9 billion.

Q: So where do the higher figures come from?

A: They’re all based on various estimates of how much interest the government will have to pay to finance the cost of covering the losses at thrifts that have already gone under, those that are insolvent today and those that might fail.

Over 33 years, because of interest expenses, the Bush Administration estimates total outlays at $175.4 billion. Of that total, taxpayers would have to pay $94.1 billion.

Q: But has the Bush Administration, in presenting a $90-billion estimate for the bailout, been misleading the public about its full cost?

A: Not really. The losses at insolvent thrifts, according to the Administration’s best estimates, won’t exceed $90 billion. That’s money they know is gone. It was lost by thrifts on bad loans and wasted investments, mostly because oil prices unexpectedly collapsed in the early 1980s, bringing down with them a host of real estate and energy projects that had been built on hopes that ever-rising oil prices would generate more wealth in Texas and other Southwestern energy states.

But there was also widespread fraud and dangerous risk-taking as well, as fast-buck operators took advantage of financial deregulation to pour money into speculative ventures across the country. Since Congress has promised to guarantee deposits at banks and S&Ls; to protect the nation’s financial system against collapse, it’s the job of the federal government to cover those losses.

Q: Why not pay all the costs now?

A: In effect, the government is taking out a mortgage on the bailout. Consider a homeowner who buys a $200,000 house. Few home buyers have $200,000 in cash. Typically, the buyer might make a $40,000 down payment and finance the rest of the purchase by borrowing $160,000. If all the interest costs were added up over 30 years, they would total much more than the purchase price. But few homeowners worry about that.

Well, the government doesn’t have $90 billion in extra cash. If it tried to pay off all the depositors out of its current proceeds, it would have to decimate existing federal programs or drastically boost taxes for one year, probably plunging the economy into a recession.

Q: What will the financing scheme add to the cost?

A: About $22 billion in real extra costs. The interest payments will be spread over the next 30 years. Government officials, like business managers who also must finance certain capital investments, rely on a calculation called “present value” to determine what it would cost in today’s dollars to finance an expenditure over time. Because money spent in the future is worth less than money spent today, that calculation best represents the full cost of any financing plan.

The Administration’s estimate of the “present value” of its 30-year, $175.4-billion spending plan is $111.7 billion in 1989 dollars, or roughly $22 billion more than paying the $90 billion immediately.

The taxpayers make relatively more of their $94.1-billion contribution toward the end of the 33-year period. So the present value of their share of the bill is only $26.6 billion.

Q: Could it get worse?

A: Sure. The worst case has been offered by House Banking Committee Chairman Henry B. Gonzalez. Utilizing much more pessimistic assumptions than the Administration, he came up with a total cost of $335 billion by adding up all past and projected future expenses on S&Ls; over the next 30 years.

He forecast that the government would collect $152 billion from various sources, leaving the Treasury with $183 billion in expenses that would have to be paid out of taxpayers’ pockets.

Q: Why shouldn’t the government simply refuse to pay?

A: There are many valid questions that can be raised about whether the Administration has proposed the best way to absorb the insolvent thrifts’ losses. But the problem can’t be ignored.