S&L; Losses Hit Record $12.1 Billion in ’88

The nation’s savings and loans lost a record $12.1 billion in 1988 and face continuing problems in 1989 from rising interest rates, the government said Tuesday.

The Federal Home Loan Bank Board said the 2,949 S&Ls; lost $2.3 billion in the fourth quarter, pushing red ink for the year well past the previous record of $7.8 billion set in 1987.

Still, losses in the second half of the year, $4.1 billion, were down substantially from the first half’s $8 billion, largely because of government efforts to close, merge or prop up 223 institutions, also a post-Depression record.

James Barth, chief economist of the bank board, said the worst may be over, but he warned that the effect of rising interest rates in 1989 will be “obviously adverse.”

“Operating income should be lower across the board for all thrifts in the first and second quarters,” he said. But he also added: “I would guess we aren’t going to see $12.1 billion (in losses) in 1989.”

Savings and loans make their money by borrowing short term from depositors and lending long term for mortgages and other purposes. When rates follow a normal pattern--higher long rates and lower short rates, institutions earn more on loans than they pay to depositors. But currently short-term rates approach and in some cases surpass long-term rates, severely cutting into earnings.

Much of 1988’s red ink was old in the sense that institutions finally got around to recognizing bad loans that had long ago gone sour. About $11 billion in such non-operating losses, together with $1.9 billion in tax payments by the industry, more than offset a modest $900-million profit on current operations.

Will Mask Losses

Most analysts believe that the non-operating losses will ease in 1989, while rising interest rates will erode operating profits.

Bert Ely, an Alexandria, Va., financial institutions analyst, said government assistance paid to S&Ls; this year as a result of last year’s rescue deals will mask $5 billion to $6 billion in 1989 losses.

“It’s just like the farm economy; if we have better results in 1989, it’s only because a substantial subsidy is being pumped into the industry,” he said.

In another result of government spending, the industry’s capital hit a record $46.2 billion at the end of 1988, amounting to 3.4% of $1.4 trillion in loans and other assets.

That’s up from 2.7% at the end of 1987, but the industry still has a long way to go to come up to the 6% that is standard for banks and would be required of S&Ls; by June, 1991, under President Bush’s plan for dealing with the S&L; crisis.

Meanwhile, the bank board’s Barth said the heaviest losses continue to be concentrated in just a few institutions, with the 20 most troubled institutions losing $2 billion in the fourth quarter.

Nine of the worst 20 were in Texas, and the state’s 204 institutions collectively lost $1.38 billion in the fourth quarter.

For the year, the 30% of the industry that was unprofitable lost $17.7 billion, more than swamping the $5.6 billion earned by solvent institutions.

The agency also said the number of insolvent institutions at year-end declined for the first time in the decade from 520 at the end of 1987 to 364 at the end of 1988.

So far this year, the bank board has shut down or sold 11 of those 364. It lists about another 250 institutions as solvent but troubled and likely to require government action.

In other savings and loan developments Tuesday:

Budget Director Richard Darman, appearing before a House Banking subcommittee, defended plans to borrow S&L; rescue money in a way that would keep $50 billion from showing up in the federal budget deficit.

Some members of Congress have suggested that the S&L; costs should be added to the budget for the current fiscal year, now that the deadline for automatic spending cuts has passed. Others say the money could be spent “on-budget” in 1990 but not counted when computing deficit-reduction requirements under the Gramm-Rudman law.

However, Darman said that would send a signal to deficit-wary financial markets that “there’s absolutely no discipline to the Gramm-Rudman process.” And, uneasiness on Wall Street could translate into higher interest rates that would make the S&L; rescue costs higher, he said.