STRANGE SILENCE IN S&L; DEBATE : Those on Capitol Hill Who Failed to Heed Warnings Are Reticent to Respond to Bush Bailout Plan

The real horror of the “Great Savings and Loan Crisis of 1989” is that no one, not President Bush, not Congress nor the S&Ls; themselves, are willing to address the root causes of the disaster. What this means is that whatever solution Washington finally agrees upon probably won’t work very well or at all.

While politics long has been the art of the possible, the trouble starts when there are so many separate agendas in conflict with one another that the art of the possible becomes corrupted into the craft of concealment and dissembling.

By the same logic that allowed the staunchly anti-Red Richard M. Nixon to open doors to China, so it is that ardent free marketeer George Bush unblushingly proposed to nationalize scores of billions of dollars worth of S&L; assets and to pay for them with money he will raise by dipping into our own savings accounts.

The Bush plan calls for $50 billion in long-term bonds to be sold on Wall Street as part of a $150-billion-plus bailout and reorganization of the thrifts. Healthy savings and loans will be tapped twice, not only for cash to prop up ailing competitors but also to be part of the buyers’ market to take over the 350 estimated “zombies”--S&Ls; that are among the walking dead.

The big winners in the turf wars are Treasury Secretary Nicholas F. Brady and L. William Seidman, head of the Federal Deposit Insurance Corp., which insures and regulates most U.S. banks. Brady will take charge of the Federal Home Loan Bank Board, which does for the S&Ls; what Seidman’s FDIC does for the banks.

Seidman gets the FHLB’s insurance arm (the Federal Savings and Loan Insurance Corp.) and two New Deal-sounding agencies, the Resolution Funding Corp. and the Resolution Trusts, that will sell the $50 billion in long-term bonds. The Treasury will use your money to guarantee the principal of those bonds. The approximately 1,500 healthy S&Ls; will buy those bonds (somewhat unwillingly) and the interest probably will be paid by our tax dollars as well.

Oh, yes, while the S&Ls; are busy pasting up the new FDIC deposit insurance decal on their doors, they will also be brought under tougher accounting rules and capital standards under the Bush plan. And $50 million more is to be given to the Justice Department to track down the upward of $3 billion in outright fraudulent losses that are estimated to be among the widespread wreckage of the zombies.

If all this raises more questions than are answered, that’s the point. Chief among the immediate questions is why the reaction to the President’s rescue plan has been muted to nonexistent from those very opposition leaders of Congress who might normally stand up and holler about anything so radical as the takeover of 350 bankrupt S&Ls; and their assets or the repackaging of all that for resale to private buyers (including banks?). Not to mention the idea of playing honest broker for perhaps as many as 1,000 other weak but salvageable thrifts.

While Congress is silent, even Bush’s budget director, Richard Darman, is conceding that the interest-rate assumptions underlying the whole plan and wildly optimistic and will have to be sharply revised.

The best answer for the quiet on Capitol Hill on the Bush plan is that many congressional leaders of both parties are taken by a fit of guilty conscience. Back in the bad old days of Jimmy Carter, the powerful S&L; lobby made a convincing case in 1980 and again in 1982 that the thrifts were being killed between the rock of high-digit short-term rates that they had to pay depositors and the hard place of lower home mortgage yields. “Deregulation” was the policy flavor of the month back then.

Like the old Chinese curse, the S&Ls; got what they had wished for. They could offer money market fund deposit rates, they could make consumer loans and ultimately were allowed to invest in commercial real estate development, luxury yachts, consumer finance and other ventures long the preserve of the banks. Better still, they thought, regulators did not apply the same capital rules as those for banks. The minimum net worth an S&L; was supposed to maintain was cut and new thrifts were given 20 years to reach the required minimum. Small wonder that people began to open chartered thrifts in nothing larger than a post office box and rake in millions.

Today, the interest rate squeeze on the thrifts is even more dangerous. Again, Congress bears part of the blame (along with the past and present occupants of the White House) for being unwilling and unable to deal with the annual budget deficit scandal.

Looking ahead, there is little chance that the $60-billion reduction in the upcoming 1990 budget deficit mandated by the Gramm-Rudman compact will be achieved any time soon. And that means that already rising U.S. interest rates will rise further. Each percentage point rise in the prime and other interest rates not only adds $5 billion to the federal budget deficits, but it also extends the S&L; zombie list well beyond 350.

So a good question might be, Just what good will that $50-billion new debt offering of the Bush Administration do except to buy time for things to get worse? And what about the billions of dollars of property--shopping centers, half-built office towers, even cemeteries--that will effectively be nationalized every time a regulatory agency takes over a zombie S&L;? The Bush plan pointedly ignored an already existing government effort to sell those bankrupt assets promptly back into the private sector and the agency is slated for dissolution.

Other questions stack up quickly. First, do we really want to do away with the dual banking system (thrifts and commercial banks) that has financed this country’s remarkable prosperity safely for the last 50 years? If so, where’s the debate on the topic? Do we really believe that regulators can handle $40 billion (or $60 billion or $100 billion) in soggy S&L; assets and get them back into the private sector? If so, where is the Bush Administration’s estimate of the real flood of property headed this way? Or don’t they know?

And what if the healthy S&Ls; refuse to help? There is a split developing in the once united front already. Last month, the San Francisco Home Loan Bank voiced the unwillingness of the bigger and older California thrifts to bail out the upstarts that jump-started their way into the fast lane of finance only to crash at the first turn.

Most important, does the Bush plan (or any likely alternative of the Congress) show any hope for creating a new financial services system that will be healthy, fraud-proof and provide efficient and safe capital management for depositor and borrower alike?

None of these questions has been addressed either on Capitol Hill or at the other end of Pennsylvania Avenue at the White House. Different agendas are in play here.