S&L; Bailout Bill May Grow, Should Be Budgeted--GAO

The General Accounting Office, warning that the Administration’s savings and loan rescue plan could cost the taxpayers more than expected, recommended Friday that the expenses be fully included in the federal budget even if it means changing the deficit reduction targets.

“To use a Texas expression, it’s time to lift the cow’s tail and face the problem squarely,” Frederick D. Wolf, assistant comptroller general, told a House Banking Committee hearing in San Antonio.

The Bush Administration has estimated that the plan will cost about $157 billion over the next 10 years, including interest on the 30-year bonds that will be used to raise cash for closing or selling hundreds of insolvent S&Ls.;

The GAO, the investigative arm of Congress, did not offer a specific estimate of its own, but warned that the Administration’s figure could be made obsolete by rapidly changing financial conditions. The GAO’s work is well respected among members of the Senate and House Banking Committees, who are becoming increasingly concerned about the potentially escalating cost to the taxpayers of the biggest financial rescue in history.

Congress and President Bush are irrevocably committed to disposing of crippled S&Ls; and restoring the solvency of the federal fund that insures deposits up to $100,000 in federally insured S&Ls.;

Question Assumption

The GAO, while applauding the Administration for offering a plan to clean up the crippled industry, warned that the taxpayers’ bill could grow considerably beyond current forecasts.

“We question (the Administration’s assumption) that interest rates will decline,” Wolf said. Higher rates would drive up the interest charges on the bonds being used to finance the clean-up of insolvent S&Ls.;

The Administration plan, which relies in part on the premium it charges S&Ls; for their federal deposit insurance, is also unduly optimistic in its estimates of future growth in S&L; deposits, the GAO said.

The plan forecasts that deposits will grow an average of 7.2% annually during the next decade. However, deposits have increased only 4.8% a year during the past three years, and they have declined in recent months because of concern over the financial health of S&Ls.;

If “deposits do not increase as projected, the amount taxpayers will have to contribute to funding the solution will increase,” Wolf said.

Under the Administration proposal, a new Resolution Trust Corp. would be created to dispose of crippled S&Ls;, either by closing them and paying off depositors or arranging the sale of the institutions to outside investors. The RTC would be funded by a $50-billion bond sale, and only the interest would be counted as part of the budget’s annual expenditures.

That arrangement has allowed the Administration to spread the cost of the S&L; rescue over 30 years instead of concentrating it in just a few years. Otherwise, the rescue package would put enormous pressure on the effort to reduce next year’s federal budget deficit to $100 billion.

‘Terrible Estimates’

Nevertheless, Wolf said, the GAO continues “to believe that an on-budget approach should be used, even if it requires revising the . . . deficit targets.”

Banking Committee Chairman Henry B. Gonzalez (D-Tex.) said federal regulators have consistently underestimated the size of the thrift crisis. Federal Home Loan Bank Board Chairman M. Danny Wall “gave us terrible estimates from the beginning,” Gonzalez said. “Each estimate was different, and each estimate was too low, the Wall Number-of-the-Month Club.”

Gonzalez said Wall and the bank board arranged “sloppy, ill-thought-out” sales of S&Ls; in the final weeks of 1988.

“In December, we saw deals put together as fast as the (bank) board could run its copying machines,” Gonzalez said. “Some of the deals now look like Santa Claus passed out the tax benefits and other goodies.”

In Washington, meanwhile, the National Assn. of Realtors said legislation to implement the S&L; industry rescue operation should assure that thrifts maintain their role as suppliers of mortgage money. Congress should insist on “a thrift industry that is, and will remain, faithful to its charter edict to provide housing finance for American home buyers,” Jerome Blank, chairman of the group’s legislative committee, told the Senate hearing.