Taxpayers Get Less Rosy Estimate on Cost of S&L; Bailout

The cost to taxpayers of President Bush’s savings and loan rescue plan will be at least $84 billion during its first 10 years, more than double the $40 billion estimated by the White House, the Congressional Budget Office said Friday.

And rising interest rates could drive the taxpayer share to $104 billion or more, Acting Director James Blum of the budget office told the Senate Banking Committee.

The Bush Administration has estimated that its plan to shut down or sell hundreds of insolvent S&Ls; will require cash outlays of $157.6 billion in its first 10 years, with a cost to taxpayers of $39.9 billion.

Under the Administration proposal, the program would be financed with premiums collected from healthy S&Ls; and sales of 30-year bonds, for which the Treasury would pay the interest.

In sharp contrast, the budget office said Friday that the outlays will reach $205 billion, with expenses of $84 billion for the Treasury.

Aggravating the Problem

Blum said Administration estimates failed to reflect the full amount of Treasury borrowing needed under the complex financing plan.

Rising interest rates also could boost the cost of the S&L; rescue program in several ways. Healthy thrifts would suffer declining profits as they are forced to pay higher rates of interest on new deposits, compared with the interest they receive on old mortgages. This could increase the number of S&Ls; that become insolvent, adding to the burden.

The Treasury also would be forced to pay higher rates of interest on bonds used to raise billions of dollars to close insolvent S&Ls; and pay off depositors.

Under the budget office’s interest-rate assumptions, which are more pessimistic than official Administration forecasts, the taxpayer share would be as much as $104 billion in the first 10 years, the period in which all the crippled S&Ls; would be closed or sold.

“The sky’s the limit,” said a worried Sen. Donald W. Riegle Jr. (D-Mich.), chairman of the Senate Banking Committee. “There’s a question of honesty in budgeting.” Under the Administration plan, “we ask you to sign the blank check today, and we’ll fill in the numbers over the next 30 years.”.

If the Bush plan is approved by Congress without changes, “it will lock in the government to pay the bill no matter how high it goes,” he said.

Opposes ‘Blank Check’

Disturbed by the spiraling cost estimates, Riegle has asked government officials and outside consultants for detailed economic studies, using different assumptions about interest rates and the level of deposits at S&Ls.;

“There is a history with this problem of low-balling the estimates,” he said in an interview Friday. “It’s a very unpleasant situation we find ourselves in. I don’t think many people on the committee want to sign a blank check.”

In financing the S&L; cleanup, “it may well be that we are going to spend more than the Administration has suggested,” he said. “But we want to know that now. There is a great value in leveling with people at the beginning.”

Although the ultimate cost to taxpayers is uncertain, the federal insurance fund that guarantees the safety of S&L; deposits up to $100,000 remains safe, Riegle said. “The deposit insurance pledges are absolute guarantees.” he said. “There’s no question . . . that the federal insurance system affords protection and will always be there.”

Last Resort

But the new budget office estimate raises the specter of open-ended taxpayer contributions to the S&L; rescue, a disturbing prospect for Riegle.

“The Treasury is the deep pocket of last resort,” he said at the hearing. “If the number gets larger, that’s where the money is.” Congress may “wake up one morning and find we have a much larger number on our hands,” he said.

Taxpayers must be the last resort for solving the problem because the S&L; industry has reached the limit of its ability to pay, Riegle said.

Healthy S&Ls; already pay premiums into the deposit insurance fund equal to about 20% of their profits, and would have to pay more under the Bush plan.

Riegle does not want to impose premiums beyond the level suggested by the Administration. “I’m hard-pressed to see how more can be found there” in the industry, he said in the interview. “We do not want to construct a plan to work in such a way that a number of thrifts now solvent become insolvent. Then the cost of the solution gets driven much higher.”